• US CPI unchanged, core CPI declines
• NZD/USD falls 1.2%
• New Zealand to release Mfg. Index on Friday

The New Zealand dollar is sharply lower on Thursday. In the North American session, NZD/USD is trading at 0.5943, down 1.27% on the day. The US dollar has strengthened against the major currencies after today’s inflation report and the New Zealand dollar has been hit particularly hard. On Friday, New Zealand releases the manufacturing index, which is expected to rise to 46.9 in September, compared to 46.1 in August. A reading below 50.0 indicates contraction.

US inflation hotter than expected

The September US inflation report was half-good-half bad, as headline CPI was unchanged while Core CPI declined. Headline CPI remained unchanged at 3.7% y/y, higher than the market estimate of 3.6% y/y. The core rate, which is a better gauge of long-term inflation trends, fell from 4.3% to 4.1% y/y, matching the market estimate. This marked the lowest level since September 2021.

The stronger-than-expected headline CPI has raised expectations that the Federal Reserve will keep rates elevated for longer and could raise rates before the end of the year. The battle to bring inflation back down to the Fed’s 2% target won’t be easy, but a new wrinkle in the equation is the sharp rise in US Treasury yields. That has meant higher borrowing costs, and some Fed members have sounded more dovish, saying that the rise in yields could slow growth and push inflation down without the Fed having to raise rates.

There is some dissension among Fed policymakers with regard to policy, as yesterday’s FOMC minutes indicated. At the September meeting, the Fed held rates for the first time in the current tightening cycle. A majority said that a rate hike would be needed “at a future meeting”, while a minority felt no more hikes were necessary. All agreed that policy should remain restrictive until the Fed was confident that inflation “is moving down sustainably” to its target.

The US dollar has posted broad gains following the inflation release, and the Fed rate odds of a hike before the end of the year have jumped to 38%, up from 26% prior to the inflation report, according to the CME FedWatch Tool.

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NZD/USD Technical

• NZD/USD is testing support at 0.5956. The next support level is 0.5905
• There is resistance at 0.6042 and 0.6093

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