NZD/USD remains under pressure near 0.5710 in Tuesday’s Asian session. 

RBNZ is set to lower its OCR by 50 bps to 3.75% on Wednesday. 

The escalating trade war might boost the US Dollar. 

The NZD/USD pair attracts some sellers to around 0.5710 during the early Asian session on Tuesday. The rising expectation that the Reserve Bank of New Zealand (RBNZ) will deliver a jumbo-sized rate cut at the February meeting on Wednesday weighs on the New Zealand Dollar (NZD). 

The RBNZ is expected to slash the Official Cash Rate (OCR) by 50 basis points (bps) on Wednesday, bringing the rate down to 3.75%. Our base case is the RBNZ will cut by 25bp at each of the following two meetings, in April and May," said ASB chief economist Nick Tuffley.

RBNZ Governor Adrian Orr will hold a press conference after the rate decision, which might offer some hints about the interest rate path in New Zealand. Any dovish remarks from the RBNZ policymakers could exert some selling pressure on the Kiwi.

The concerns of tariffs and trade war might boost the safe-haven flows, benefiting the Greenback. US President Donald Trump on Friday maintained his drumbeat of tariff threats, stating that taxes on autos will begin as soon as April 2. This was the latest action in a series of trade measures he has announced since taking office for the second term. Meanwhile, the prospect that the US Federal Reserve (Fed) would stick to its hawkish stance amid elevated inflation might act as a tailwind for the pair in the near term. 

RBNZ FAQs

What is the Reserve Bank of New Zealand?

The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are achieving and maintaining price stability – achieved when inflation, measured by the Consumer Price Index (CPI), falls within the band of between 1% and 3% – and supporting maximum sustainable employment.

How does the Reserve Bank of New Zealand’s monetary policy influence the New Zealand Dollar?

The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) decides the appropriate level of the Official Cash Rate (OCR) according to its objectives. When inflation is above target, the bank will attempt to tame it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken NZD.

Why does the Reserve Bank of New Zealand care about employment?

Employment is important for the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration in inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise more and more quickly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says.

What is Quantitative Easing (QE)?

In extreme situations, the Reserve Bank of New Zealand (RBNZ) can enact a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions with the aim to increase the domestic money supply and spur economic activity. QE usually results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the objectives of the central bank. The RBNZ used it during the Covid-19 pandemic.

Source: FXSTREET

Germany is particularly vulnerable to US trade tariffs, which could curb growth for years to come and hold back an economy already suffering through two straight years of contraction, Bundesbank President Joachim Nagel said on Monday.

Germany, Europe's largest economy, has been in a deep industrial recession, due in great part to subsidised Chinese output crowding out German products at a time when soaring energy costs at home are already weighing on competitiveness.

Modelling projections based on tariff threats from U.S. President Donald Trump, the Bundesbank concluded that Germany would suffer but the U.S. would also take a hit that would more than offset any positive impact of the trade barriers.

"Our strong export orientation makes us particularly vulnerable," Nagel said in a speech. "Economic output in 2027 would be almost 1.5 percentage points lower than forecast," he added.

The Bundesbank sees the German economy growing by 0.2% this year and 0.8% in 2026, suggesting that a 1.5% point hit over the next three years would result in more economic contraction.

"Contrary to what the (U.S.) government has announced, the consequences of the tariffs for the USA should therefore be negative," Nagel added. "The loss of purchasing power and increased costs for intermediate inputs would outweigh any competitive advantages for U.S. industry."

Fabio Panetta, Italy's central bank chief, has also concluded that the U.S. would take a large hit.

Speaking on the weekend, he said that if all tariffs hinted at by Trump before the election were implemented and they were followed by retaliatory measures, global GDP growth would fall by 1.5 percentage points with the U.S. economy suffering a 2 percentage point hit.

The big risk, Panetta argued, was that Chinese firms shut out of the U.S. would seek new markets and could squeeze out European producers.

One saw only a minor impact while another anticipated a large increase in price pressures because retaliatory tariffs would be passed onto consumers while a weak euro would weigh on import costs, Nagel added.

Source: Theedgemarkets