NZD/USD depreciates to near 0.5650 ahead of Fed policy decision

• NZD/USD loses ground amid risk aversion ahead of Fed interest rate decision on Wednesday.
• Traders expect the Fed to maintain its policy rate within the target range of 4.25%-4.50%.
• The RBNZ is widely expected to deliver another bumper 50 bps rate cut in February.

NZD/USD continues to lose ground for the third consecutive day, trading around 0.5660 during the European hours on Wednesday. The pair faces challenges amid risk-off sentiment ahead of the Federal Reserve's (Fed) interest rate decision scheduled later in the North American session.

The US Dollar Index (DXY), which measures the US Dollar's (USD) value against six major currencies, remains steady around 108.00 at the time of writing. The US Dollar receives support from the Federal Reserve's (Fed) cautious stance regarding its policy outlook.

According to the CME FedWatch tool, market expectations indicate nearly 100% certainty that the Fed will maintain its policy rate within the target range of 4.25%-4.50%. However, traders will be closely monitoring Fed Chair Jerome Powell's press conference for any hints regarding the future direction of monetary policy.

Additionally, the Greenback gained ground following tariff threats made by US President Donald Trump. Trump announced plans on Monday evening to impose tariffs on imports of computer chips, pharmaceuticals, steel, aluminum, and copper. The goal is to shift production to the United States (US) and bolster domestic manufacturing.

The New Zealand Dollar struggles due to dovish expectations surrounding the Reserve Bank of New Zealand's (RBNZ) policy stance. Swaps markets are now pricing in nearly a 90% chance of another 50 bps reduction on February 19, adding to the two cuts already delivered earlier in the cycle. The central bank is expected to deliver a total of 100 bps of rate cuts for the remainder of 2025.

RBNZ Chief Economist Conway stated on Wednesday that the Official Cash Rate (OCR) is expected to move toward the neutral interest rate in the absence of future shocks. The long-term nominal neutral interest rate is currently estimated to be between 2.5% and 3.5%. The Monetary Policy Committee remains confident that persistent domestic inflationary pressures will subside. A decline in domestic pricing intentions and inflation expectations is expected to pave the way for further easing of the OCR, as indicated in November.