• NZD/USD edges higher to around 0.5615 in Friday’s early Asian session.
• Fed’s Waller suggested rates did not need to rise immediately.
• Westpac economists anticipate the RBNZ to pause in October but raise OCR in December.

The NZD/USD pair gains traction to near 0.5615 during the early Asian trading hours on Friday. The US Dollar (USD) weakens against the New Zealand Dollar (NZD) amid easing Treasury bond yields. Traders weigh lingering inflation concerns and the outlook for Federal Reserve (Fed) interest rates. The Michigan Consumer Sentiment Index data for October will be released later on Friday.

Last month, the Fed voted unanimously to hike the policy ‌rate by a quarter of a percentage point. St. Louis Fed President Alberto Musalem said on Thursday that the US central bank will need to hike rates again to bring inflation back to its 2% target, although he declined to say what policymakers should do at their meeting later this month.

Fed Governor Christopher Waller stated that further rate hikes will likely be needed to lower inflation to the Fed’s 2% target, but added there was “flexibility” about ‌the pace of increases and left the door open for a pause at the upcoming October meeting.

Easing expectations for further rate increases by the Fed weigh on bond yields. The benchmark 10-year Treasury yield declined more than 4 basis points (bps) to 5.227% after hitting its highest level since 2002 this week. Meanwhile, the 30-year Treasury bond yield fell more than 5 bps to 5.602% after trading around a 24-year high recently.

Traders are pricing in 17.7% odds of a rate hike in October and an 83% probability of an increase in December, according to the CME FedWatch tool.

Westpac analysts still expect the Reserve Bank of New Zealand to hold the Official Cash Rate (OCR) steady at 2.75% this month, with a 25 bps rise in December, and two further increases in early 2027.

USD extends gains as oil and yields surge but Fed expectations stay muted

Strategists at Scotiabank highlight that the “USD continues to show broad strength and is entering Thursday’s NA session with gains against all of the G10 currencies,” even as underlying rate expectations remain relatively contained. They note that the geopolitical backdrop is feeding directly into core markets, with “the impact on oil prices and global bond yields… clear, with WTI up $4/bbl on the day and trading back above $90/bbl as the US 10Y threatens fresh multi-decade highs above 5.35% nearing levels last seen in 2002.” Despite these moves, Scotiabank points out that “Fed pricing remains muted with only 5bpts of tightening priced for October and a cumulative 26bpts by December, showing little reaction to the latest turn in oil prices.”

Waller flags more Fed hikes but signals flexible pace, keeping Dollar supported

Fed’s Waller delivered a distinctly hawkish message, with an FXS Speechtracker score of 8/10, above the established baseline of 7.2/10, underscoring a stronger-than-usual tightening bias. The emphasis that “more hikes [are] needed” but that they need not come at consecutive meetings signals a preference for a higher terminal rate with tactical flexibility, while highlighting AI-related investment and ongoing energy shocks as persistent inflation drivers alongside a strengthening economy and a still “solid and stable” labor market. Concern that inflation has been above target for nearly 5-1/2 years and could unanchor expectations reinforces a bias toward further policy tightening, a configuration that is typically supportive for the Dollar.

The FXS Fed Sentiment Index rose by 0.42 points to 138.34, firmly in hawkish territory and consistent with the elevated FXS Speechtracker reading. This move confirms that market-implied Fed stance has shifted further toward tightening expectations, reinforcing a hawkish policy narrative that should remain a medium-term positive for the Dollar.

Technical Analysis: NZD/USD retains a negative tone below the 100-day SMA

In the daily chart, NZD/USD keeps a bearish near-term tone as spot holds beneath the 20-period Bollinger middle band the 100-day moving average (MA). Price is also capped by the upper Bollinger band 8, reinforcing a downside bias despite the Relative Strength Index (14) edging up toward 33, which only hints that previous oversold conditions may be easing rather than signaling a bullish reversal.

On the topside, initial resistance is located at the Bollinger middle band around 0.5665, followed by the upper band at 0.5778 and then the 100-day MA at 0.5795, where a sustained break would be needed to challenge the prevailing bearish structure. On the downside, the lower Bollinger band at 0.5555 offers immediate support, and a daily close below this level would open the door to a fresh leg lower toward the mid-0.55s.