NZD/USD slides to two-year low, closer to mid-0.5700s amid divergent RBNZ-Fed expectations

• NZD/USD drifts lower for the fourth straight day and is pressured by a combination of factors.
• The RBNZ's dovish tilt continues to weigh on the NZD on the back of US-China trade war fears.
• Bets that the Fed will pause its rate-cutting cycle underpin the USD and also weigh on the pair.

The NZD/USD pair prolongs its weekly downtrend for the fourth consecutive day and drops to the 0.5755 area, or a fresh low since November 2022 during the first half of the European session on Friday. 

The New Zealand Dollar (NZD) continues with its relative underperformance on the back of a more aggressive policy easing by the Reserve Bank of New Zealand (RBNZ) and concerns about China's economic recovery. The US Dollar (USD), on the other hand, consolidates its recent gains registered over the past week or so, to a fresh monthly peak and exerts additional downward pressure on the NZD/USD pair. 

This week's release of the US Consumer Price Index (CPI) and the Producer Price Index (PPI) indicated that the progress in lowering inflation to the Federal Reserve's (Fed) 2% target has virtually stalled. This, along with expectations that US President Donald Trump's expansionary policies will boost inflation, suggests that the Fed will adopt a more cautious stance on cutting interest rates going forward.

The prospects for a less dovish Fed remain supportive of a further rise in the US Treasury bond yields and continue to act as a tailwind for the USD. Apart from this, geopolitical risks stemming from the protracted Russia-Ukraine war and tensions in the Middle East, along with renewed trade war fears, further benefit the safe-haven Greenback and contribute to driving flows away from the risk-sensitive Kiwi. 

There isn't any relevant market-moving economic data due for release from the US on Friday, leaving the NZD/USD pair at the mercy of the USD price dynamics. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for spot prices remains on the downside. Traders, however, might refrain from placing aggressive bets ahead of the crucial FOMC meeting next week.