• NZD/USD rebounds to near 0.5590 in Tuesday’s early European session.
• Geopolitical tensions and energy shocks weigh on riskier assets such as New Zealand Dollar.
• Traders brace for the US CPI inflation report on Wednesday for more clues about the Fed rate path.

The NZD/USD pair recovers some lost ground around 0.5590 during the early European trading hours on Tuesday. However, the potential upside for the pair might be limited as it currently trades near an 18-month low amid ongoing Middle East tensions and higher oil prices. The key US inflation reports will take center stage later this week.

Uncertainty remained elevated after Ukrainian President Volodymyr Zelenskiy accused Russia of violating an energy ceasefire announced by US President Donald Trump. Meanwhile, the Saudi-led coalition fighting Yemen’s Iran-backed Houthis said on Monday that it was dealing with another round of drone and missile attacks directed at Saudi Arabia.

Ongoing conflict between Russia and Ukraine and rising Middle East tensions could boost safe-haven flows, supporting the Greenback.

Traders await Wednesday’s US Consumer Price Index (CPI) report, which economists expect to reinforce expectations for further monetary tightening. Markets anticipate the US Federal Reserve (Fed) to keep rates unchanged at its next two-day meeting later this month.

Fed funds futures are pricing in an implied 80.6% odds that the US central bank will remain on hold, down from 82.3% on Friday, according to the CME FedWatch tool.

“Several Fed officials have pushed back against a back-to-back hike at the October 28 FOMC meeting, potentially limiting the USD’s upside,” DBS analysts wrote in a note.

Dollar steadies near key index level as Fed pause bets hinge on US CPI

Analysts at MUFG/BTMU highlight that “the major foreign exchange rates have remained stable overnight with the Dollar index continuing to trade close to year-to-date levels at just above the 102.00-level.” They note that “the recent run of softer US data (PCE deflator report for August and NFP report for September) alongside cautious comments over the need for another back-to-back hike from the Fed’s leadership have dampened expectations for another rate hike as soon as this month.”

According to MUFG/BTMU, “market expectations for the Fed to stay on hold this month will be tested by the release on Wednesday of the latest US CPI report for September.” The bank adds that “unless there is a significant upside surprise for underlying inflation, we expect the Fed to leave rates on hold this month,” while stressing that “it is likely to be only a temporary pause as the Fed currently plans to hike rates again before the end of this year in December.”

Hammack leans hawkish as inflation mindset fears bolster Dollar

Fed’s Hammack delivers a notably more hawkish tone, with an FXS Speechtracker score of 8.4/10 compared to the established baseline of 7.5/10, underscoring a clear preference for tighter policy. The emphasis on “interest rates need to be higher,” broad-based inflation pressures, and the risk of an entrenched inflationary mindset, alongside a view that financial conditions are only neutral, points to a bias for further tightening via smaller, frequent moves. Hammack’s focus on strong demand, AI-driven pressures, and unanchored pricing behavior reinforces a restrictive stance that is supportive for the Dollar and negative for risk-sensitive assets.

The FXS Fed Sentiment Index rises by 0.59 points to 138.92, firmly in hawkish territory and consistent with the elevated FXS Speechtracker reading. This move signals that Fed communication is skewing more toward pre-emptive tightening, reinforcing expectations for higher-for-longer rates and underpinning Dollar strength against lower-yielding peers.

Technical Analysis: Negative outlook of NZD/USD prevails below 100-day SMA

In the daily chart, NZD/USD keeps a bearish near-term bias as spot remains under the 100-day simple moving average (SMA) and below the Bollinger Bands’ middle line. Price is only slightly above the lower Bollinger Band, indicating it is hovering close to the recent downside envelope, while the Relative Strength Index (14) at 30.1 sits on the edge of oversold territory, hinting that selling pressure is stretched but still dominant.

On the topside, initial resistance appears at the Bollinger middle band around 0.5650, ahead of the upper band near 0.5745, with the 100-day SMA at 0.5790 reinforcing a broader bearish cap on rallies. On the downside, the lower Bollinger Band at 0.5550 acts as the first notable support, and a clear break beneath this floor would open the way for an extension of the downtrend toward fresh lows.