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NZD/USD advances to 3-week highs – awaits Fed’s decision

Today's price action in the FX market will largely be dependant on the Fed's monetary policy decision.

Traders bought the New Zealand dollar today as a reaction to the domestic data, but everything can change after today’s FOMC decision, due later in the day.

Labor market remains robust

The employment figures (Q1) released by Statz NZ were better than expected. In contrast to market expectations of 0.4% and the previous report of 0.2%, the Employment Change came in at 0.8%. In addition, despite expectations of 3.5%, the unemployment rate was reported at 3.4%, the same as the previous quarter.

Moreover, quarterly Labor Cost Index data showed an acceleration of 0.8%, lower than the estimates and the previous release of 1.1%. Likewise, the annual Employment Cost Index came in at 4.5%, below the 4.6% forecast but higher than the 4.3% figure previously released.

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Since rising employment levels have the potential to keep consumers’ expenditures relatively stable, the Reserve Bank of New Zealand (RBNZ) may be compelled to maintain its hawkish stance in the near future.

Recall that in April, RBNZ Governor Adrian Orr unexpectedly raised the OCR by 50 basis points (bps) to 5.25% in an effort to mitigate continued inflation.

NZ financial sector seems resilient

Meanwhile, the Reserve Bank of New Zealand (RBNZ) stated in its semiannual Financial Stability Report (FSR) on Wednesday that New Zealand’s financial system remains resilient. Still, household cash-flow pressures are growing, and buffers will likely be tested.

Since the bank believes that the current level of lending activity does not threaten financial stability, it is considering relaxing restrictions on loan-to-value ratios for mortgages.

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The FSR also noted rising cash-flow pressures and the expected testing of buffers, with a sharp increase in unemployment continuing to pose the greatest threat to domestic fiscal health.

The report also noted that overall, consumer and business confidence is low, pointing to a weaker outlook for household consumption and business investment due to the depressing impacts of rising loan service costs.

All eyes are on the Fed (again)

Prior to the Fed’s much-anticipated policy statement later in the American session, the ADP private sector employment data for April and the ISM’s Services PMI survey will be included in the US economic agenda.

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After the May policy meeting, the Fed’s policy rate is widely expected to increase by 25 basis points (bps) to a range of 5-5.25%. For clues as to whether or not the Federal Reserve will stop its tightening cycle beginning in June, investors will scrutinize the language of the policy statement released by the central bank.

Given indications of a weakening labor market, worries regarding the health of the country’s smaller banks, and unpredictability over the debt ceiling, markets currently anticipate rate cuts toward the end of the year.

“Inflation remains ‘unacceptably high,’ but banking stresses are leading to a tightening of lending conditions, which will do more to slow the economy than the likely 25bp hike on Wednesday,” said analysts at ING in a note.

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