NZD/USD pulls back toward 0.5800 ahead of RBNZ decision

• The New Zealand Dollar erases recent gains as markets anticipate another rate cut from the Reserve Bank of New Zealand.
• Investors are split between a 25 or 50 basis point rate cut following the second-quarter GDP contraction.
• The US Dollar strengthens, supported by weakness in the Euro and the Yen.

NZD/USD retreats on Tuesday, extending consolidation below 0.5840 to trade near 0.5810 at the time of writing. Market participants turn their attention to the Reserve Bank of New Zealand's (RBNZ) monetary policy decision due on Wednesday.

The New Zealand central bank is widely expected to cut its Official Cash Rate (OCR), currently at 3%, to support a weakening economy. However, markets remain divided between a 25-basis-point reduction to 2.75% and a more aggressive 50-basis-point move to 2.50%. The move would be the eighth rate cut since August 2024.

According to Brown Brothers Harriman, "the 0.9% GDP contraction in the second quarter leaves scope for the RBNZ to front-load rate cuts." The RBNZ had already indicated in September that "there is scope to lower the Official Cash Rate further."

Commerzbank also considers a 25-basis-point cut as the most likely scenario, adding that "the market has already fully priced in this decision," and that "the New Zealand Dollar (NZD) is therefore unlikely to react strongly." The bank notes, however, that persistently weak growth and recent signs of cooling inflation are likely to prompt the RBNZ to continue its easing cycle in the coming months.

Meanwhile, the US Dollar (USD) remains firm, supported by political and fiscal uncertainty in France and Japan, which weighs on the Euro (EUR) and the Japanese Yen (JPY). Investors are still confident that the US Federal Reserve (Fed) will deliver rate cuts in October and December, which nonetheless limits the Greenback's upside potential.