New Zealand Dollar extends gains and marks fresh 7 month high

Key Movers

Newsflow was limited and tier-one data was absent through trade on Tuesday allowing markets to extend recent moves and drive the USD downward. The US DXY index fell a further 0.3% as US equities edged higher and 2-year treasuries moved lower. Markets largely ignored an improved US consumer confidence report as the rise in sentiment was attributed to expectations for lower interest rates while labour market indicators suggest further softening in employment conditions. With the USD on the back foot, the GBP outperformed while the CAD extended on Monday’s gains and the euro moved back toward US$1.12. The Great British pound has been among the best performers through the last 3 weeks as markets price in a near-term divergence in monetary policy. While the Fed has signalled a shift in focus away from inflation and toward protecting the labour market, preparing investors for a series of rate cuts into the end of 2024 the Bank of England in contrast has made it clear it does not yet believe the battle against inflation is over. Instead, it has signalled rates will remain higher for longer and markets have priced out a slower pace of easing with rates expected to stay at their current level until November. On the heels of this anticipated yield advantage, the pound has surged to a fresh 2-year high, extending above US$1.3260 overnight.

Our attention now turns to Friday's US PCE index print ahead of next week all important payrolls report. With focus shifting to labour market performance the Fed’s preferred measure of inflation will prove key in shaping expectations for a 25- or 50-point cut.