The US Dollar (USD) maintained a firm tone against major currencies, including the New Zealand Dollar (NZD), as markets remained cautious ahead of the highly anticipated two-day Federal Open Market Committee (FOMC) policy meeting starting Tuesday, with the decision due on Wednesday [1][2][3]. The NZD/USD pair turned lower for the second consecutive day, trading around 0.5770-0.5765, just above last week's swing low, as the USD's safe-haven appeal persisted amid ongoing geopolitical uncertainties in the Middle East [1].
Geopolitical developments played a significant role in market sentiment. The US paused its bombing campaign against Iran after roughly two weeks of strikes, and President Donald Trump stated that the US was having 'good talks' with Iran, raising hopes for a diplomatic resolution [1][2][3]. However, optimism faded after Saudi Arabia, Jordan, and Iraq reported drone attacks, and Trump warned that US strikes would resume if negotiations failed [1][3]. Tehran's foreign ministry countered that no direct negotiations with the US were taking place, only with Oman regarding the Strait of Hormuz [2]. Meanwhile, Yemen’s Iran-backed Houthis announced a maritime blockade against Saudi Arabia and attacked Saudi oil installations, keeping energy supply concerns elevated [3].
The US Dollar Index (DXY) traded around 101.50, losing ground after three days of gains, as traders hesitated to take aggressive positions ahead of the Fed's decision [2]. According to the CME FedWatch Tool, markets are pricing in nearly a 38% chance of a rate hike in July, reflecting high uncertainty [2]. Citadel Securities expects the Fed to deliver a rate increase to solidify Chairman Kevin Warsh’s inflation-fighting credibility, while the probability of at least a 25-basis-point hike in September stands at approximately 81.4% [2].
Gold (XAU/USD) weakened below the $4,050 level, with downside potential limited as USD bulls paused ahead of the FOMC meeting [3]. The fundamental backdrop remains supportive of the USD, with traders awaiting the Fed's policy statement and press conference for cues on the future policy path [1][2][3]. In New Zealand, expectations for another Reserve Bank of New Zealand (RBNZ) rate hike in September could support the NZD, with strategists at Brown Brothers Harriman noting that swaps markets price in 60bps of hikes by year-end and a total of 100bps over the next twelve months, potentially bringing the Official Cash Rate to 3.50% [1].
CONCLUSION
Markets are in a holding pattern as geopolitical tensions and uncertainty over the Federal Reserve's next move keep the US Dollar supported and weigh on risk assets like the New Zealand Dollar and gold. The upcoming FOMC decision and accompanying guidance are expected to provide crucial direction for currency and commodity markets. Until then, traders remain cautious, with rate hike expectations and geopolitical risks dominating sentiment.