NZD/USD drops to near 0.6250 due to diminishing odds of an aggressive rate cut by the Fed

• NZD/USD extends its losses as US PCE Index data diminish odds of an aggressive Fed rate cut in September.
• According to the CME FedWatch Tool suggests a 70.0% chance of at least a 25 basis point Fed rate cut in September.
• The Kiwi Dollar may depreciate further as the RBNZ is expected to deliver a 25 basis points rate cut in 2024.

NZD/USD continues to lose ground, trading around 0.6230 during the European hours on Monday. The NZD/USD pair depreciates as the US Dollar (USD) receives support amid diminishing odds of an aggressive interest rate cut by the US Federal Reserve rate in September.

The dovish sentiment regarding the Fed's policy outlook was tempered after the release of July's US Personal Consumption Expenditures (PCE) Index data on Friday. The PCE Price Index showed a 2.5% year-over-year increase in July, matching the previous reading but falling short of the expected 2.6%. Similarly, the core PCE rose by 2.6% year-over-year, in line with the prior figure but slightly below the forecasted 2.7%.

According to the CME FedWatch Tool, markets are 70% confident of at least a 25 basis point (bps) rate cut by the Fed at its September meeting. Traders are now expected to focus on the upcoming US employment data, particularly the Nonfarm Payrolls (NFP) for August, to gain more clarity on the potential size and timing of the Fed's rate cuts.

In New Zealand, the Reserve Bank of New Zealand (RBNZ) unexpectedly cut its benchmark rate in August, earlier than previously indicated, citing a slowing economy that has increased confidence that inflation will return to its 1-3% target range. Markets are now anticipating further quarter-point rate cuts in October and November, which could place downward pressure on the New Zealand Dollar (NZD) and weaken the NZD/USD pair.