NZD/USD inches higher to near 0.5650 following Caixin Services PMI for China

• NZD/USD rose as Caixin China Services PMI marked the fastest growth in December since May 2024.
• the US Dollar strengthens on the Fed's hawkish shift regarding its policy outlook.
• Fed officials have indicated a cautious approach to rate cuts planned for 2025.

NZD/USD extends its gains for the second successive day, trading around 0.5630 during the European hours on Monday. The pair appreciates as the New Zealand Dollar (NZD) strengthens following the Caixin Services PMI for China, its key trading partner.

The Caixin China Services Purchasing Managers' Index (PMI) rose to 52.2 in December 2024, up from 51.5 in November, exceeding market expectations of 51.7. This marks the fastest growth in the services sector since May. However, the Caixin Manufacturing PMI, released on Thursday, unexpectedly fell to 50.5 in December, down from 51.5 in November, missing market forecasts of 51.7.

According to Reuters, the Shanghai Stock Exchange has committed to deepen capital markets opening during a meeting with foreign institutions. China's economy is underpinned by solid fundamentals and demonstrates resilience amid a complex global environment. The Financial Times reported on Friday that the People's Bank of China (PBoC) anticipates an interest rate cut at an appropriate time this year. Given their close trade relationship, fluctuations in China's economy often have a notable impact on Australian markets.

The upside potential of the NZD/USD pair may remain limited as the US Dollar could strengthen further, with the hawkish shift by the Federal Reserve (Fed), expecting to pause its easing cycle during the January meeting after three consecutive rate cuts. The Fed's latest Summary of Economic Projections, including the dot plot, indicates that policymakers anticipate the Federal Funds Rate to reach 3.9% by year-end, suggesting expectations for only two rate cuts in 2025. 

Fed officials have also signaled a cautious stance on rate reductions for 2025. On Friday, Richmond Fed President Thomas Barkin emphasized that the policy rate should remain restrictive until there is greater confidence that inflation is on track to return to the 2% target. Similarly, Fed Governor Adriana Kugler highlighted the delicate balancing act facing the US central bank as it aims to slow the pace of monetary easing this year.