The Australian and New Zealand dollars declined against a strengthening U.S. dollar on Tuesday, as currency traders turned their attention to the upcoming interest rate decision from the Reserve Bank of New Zealand (RBNZ). The U.S. Dollar Index (DXY) reached a two-month high, increasing pressure on commodity-linked currencies.
Key Takeaways
- The U.S. dollar surged, with the DXY posting its largest single-day gain in eight trading sessions, pressuring both the AUD and NZD.
- The Reserve Bank of New Zealand (RBNZ) is widely expected to announce an interest rate cut, with market consensus pointing to a 25 basis point reduction.
- Technical indicators for AUD/USD and NZD/USD suggest a bearish outlook, with both currencies facing significant resistance levels.
- The AUD/NZD cross-currency pair shows potential for Australian dollar outperformance, depending on the RBNZ's statement.
U.S. Dollar Gains Momentum Across Major Pairs
The U.S. dollar emerged as the top-performing major currency on Tuesday. The U.S. Dollar Index (DXY), which measures the greenback against a basket of six other major currencies, closed at its highest level in two months. This rally marked the index's most significant single-day advance in over a week.
Several factors have contributed to the dollar's recent strength. While a U.S. government shutdown has limited the release of new economic data, the market has initially interpreted this as a source of stability for the dollar. However, analysts note that a prolonged period of government inaction could eventually shift sentiment against the currency.
The dollar's advance was broad-based. The USD/JPY pair climbed to a seven-month high as the Japanese yen continued to weaken. This weakness is largely attributed to expectations that Japan's incoming prime minister will pursue a stimulus-focused policy agenda.
Market Movements
- U.S. Dollar Index (DXY): Reached a two-month high.
- USD/JPY: Extended its rally to a seven-month peak.
- EUR/USD: Declined for a second consecutive day, nearing key support at 1.1645.
Focus Shifts to New Zealand's Central Bank
The primary focus for traders in the Asia-Pacific session is the RBNZ's monetary policy announcement. The central bank is widely anticipated to lower its Official Cash Rate (OCR) in response to signs of slowing economic activity.
What is the Official Cash Rate (OCR)?
The OCR is the main tool the RBNZ uses to manage inflation and economic stability. By changing the OCR, the central bank influences interest rates across the New Zealand economy, affecting borrowing costs for banks, businesses, and consumers.
Market consensus points to a 25 basis point cut, which would bring the OCR down to 2.75%. However, some analysts have not ruled out a more aggressive 50 basis point reduction, citing recent data showing weak business sentiment. A larger cut would be considered a significant dovish move and could lead to further declines for the New Zealand dollar.
The tone of the RBNZ's accompanying statement will be just as crucial as the decision itself. A dovish statement, even with a 25 basis point cut, could signal more easing is on the way, keeping the NZD under pressure.
AUD/USD Technical Outlook
The Australian dollar's recent attempt at a recovery has stalled. The AUD/USD pair faced repeated rejections near a significant resistance area between 0.6625 and 0.6630. This price zone, which corresponds to the high from July, has re-established itself as a technical barrier.
On Tuesday, the pair formed a bearish outside day, a technical pattern that often indicates a reversal of momentum. This move pushed the price back below its 20-day simple moving average (SMA), reinforcing the view that sellers are regaining control.
"Price action now favors sellers while trading beneath 0.6630, with bears likely eyeing the 50-day SMA (0.6544) and the 0.6520 support zone as near-term downside targets."
As long as the AUD/USD remains below the 0.6630 resistance, the path of least resistance appears to be downward. A decisive break below the 0.6520 support level could open the door for a test of the psychologically important 0.6500 handle. Any rallies toward the 0.6600 level may be viewed by traders as opportunities to initiate new short positions.
NZD/USD Technical Outlook
The New Zealand dollar has also shown signs of weakness after failing to sustain a move higher. The NZD/USD pair formed a prominent swing high around the 0.5847 level before reversing its course. This area is a critical resistance cluster, as it aligns with both the 200-day SMA and the 20-day exponential moving average (EMA).
The failure to hold above this resistance on Monday triggered a new wave of selling. The pair fell by nearly 0.8% on Tuesday, its largest one-day drop in more than a week. This price action has realigned momentum with the dominant daily downtrend.
Heading into the RBNZ decision, sellers appear to have the upper hand. Potential downside targets for the NZD/USD include:
- The initial support level at 0.5755.
- The 61.8% Fibonacci retracement level.
- The key psychological level at 0.5700.
The near-term outlook for NZD/USD will likely remain bearish as long as the price stays below the 0.5850 resistance zone.
AUD/NZD Cross-Currency Analysis
While both the Australian and New Zealand dollars are under pressure from the strong U.S. dollar, the dynamic between the two currencies presents a different picture. The momentum in the AUD/NZD cross-pair appears to favor the Australian dollar in the short term.
The pair found solid support at the monthly pivot point of 1.1297 on Monday, forming a doji candlestick pattern, which often signals indecision or a potential reversal. This was followed by a modest move higher on Tuesday. The uptrend is currently supported by the 10-day and 20-day EMAs, which are acting as a floor for the price.
If buying pressure continues, a move toward the 1.1400–1.1418 resistance area seems plausible. However, traders are also watching a weekly shooting star pattern that formed near the 2022 high. This pattern serves as a warning that the recent rally could be part of a larger corrective structure, suggesting that volatility may increase or that a pullback could occur before the uptrend resumes.
