New Zealand Dollar extends hawkish RBNZ-inspired rally; hits three-week high vs weaker USD

The NZD/USD pair gains strong follow-through positive traction for the third straight day and rallies to an over three-week top during the Asian session on Friday. Spot prices currently trade around the 0.5775-0.5780 region, up nearly 0.40% for the day, and remain on track to register strong gains for the second week in a row amid a combination of supporting factors.

The New Zealand Dollar (NZD) continues to be underpinned by the Reserve Bank of New Zealand's (RBNZ) hawkish outlook, which, along with a broadly weaker US Dollar (USD), acts as a tailwind for the NZD/USD pair. As was widely expected, the RBNZ raised the Official Cash Rate (OCR) by 25 basis points (bps) to 2.50% following the conclusion of the June monetary policy meeting on Wednesday. The central bank also indicated that some further reduction in monetary stimulus is likely to be required to curb inflationary pressures.

In contrast, the Minutes from the June 16–17 FOMC meeting revealed on Wednesday that policymakers were divided over the direction of interest rates. The minutes further stated that many participants indicated the appropriate level of the federal funds rate would be within or slightly below the current target range at the end of this year. The less hawkish outlook, in turn, drags the USD Index (DXY), which tracks the Greenback against a basket of currencies, to a fresh weekly low and contributes to the bid tone around the NZD/USD pair.

Meanwhile, the geopolitical risk premium resurfaced this week after the US military unleashed a new wave of strikes against Iran earlier this week in retaliation for Tehran’s attacks on commercial ships in the Strait of Hormuz. Iran responded by targeting American allies and bombing US military installations across Bahrain and Kuwait. The market anxiety, however, subsided after Trump on Thursday claimed that Iran had called to make a deal with the US, denting the USD’s safe-haven status and lending additional support to the NZD/USD pair.

Moving ahead, there isn't any relevant market-moving economic data due for release from the US on Friday, leaving the USD at the mercy of comments from influential FOMC members. Apart from this, the market focus will be on further developments surrounding the Middle East crisis, which might continue to infuse volatility in global financial markets and drive the USD. Nevertheless, the fundamental backdrop backs the case for a further appreciating move for the NZD/USD pair, which remains on track to register gains for the second straight week.