The GBP/USD pair fell under significant selling pressure early Tuesday, slipping below 1.2450 and ending its three-day winning streak. Meanwhile, the NZD/USD pair faces downward momentum due to a risk-off mood spurred by new tariff threats from US President Donald Trump. The US Dollar Index (DXY) hovers near 108.00, with market participants closely watching key US economic releases expected later in the day.
The recent tariff threats from President Trump, coupled with rebounding US bond yields, have injected strength into the Greenback. The tariffs have reignited concerns over global trade tensions, prompting investors to seek safer assets like the US Dollar. The prevailing mood has adversely affected the NZD/USD pair, as the New Zealand Dollar is particularly susceptible to shifts in investor sentiment due to its connection with New Zealand's economic health and central bank policies.
The Reserve Bank of New Zealand (RBNZ) plays a critical role in determining the value of the New Zealand Dollar. With an aim to maintain an inflation rate between 1% and 3% over the medium term, the RBNZ may increase interest rates if inflation exceeds this target. Currently, traders anticipate a 50 basis point rate cut in February as part of a broader expectation for a total of 100 basis points of rate reductions throughout 2025. Swaps markets are pricing in nearly a 90% chance of another 50 basis point reduction on February 19, following two prior cuts in this cycle.
The performance of the Chinese economy significantly impacts the Kiwi, as China is New Zealand's largest trading partner. Any fluctuations in the Chinese economy can influence New Zealand's export-driven market, especially considering the dairy industry is New Zealand's primary export. Additionally, macroeconomic data releases in New Zealand provide vital insights into the country's economic state and can affect the valuation of the New Zealand Dollar.
The current risk aversion, fueled by Trump's tariff threats and continuous buying of the US Dollar, has further undermined the NZD/USD pair. Historically, the New Zealand Dollar tends to strengthen during risk-on periods when investors are optimistic about growth and perceive broader market risks as low.