RBNZ expected to cut interest rates to 2.75% in October

• The Reserve Bank of New Zealand is expected to deliver another 25 bps cut to the key interest rate on Wednesday.
• The Monetary Policy Review will be closely scrutinized for fresh cues on the RBNZ's rate outlook.
• The New Zealand Dollar is set to experience a big reaction to the RBNZ monetary policy announcement.  

The Reserve Bank of New Zealand (RBNZ) is widely expected to cut the Official Cash Rate (OCR) by another 25 basis points (bps) from 3% to 2.75% after concluding its October monetary policy meeting on Wednesday.

The decision will be announced at 01:00 GMT, but will not be accompanied by the Monetary Policy Statement (MPS). There will be no press conference by RBNZ Governor Christian Hawkesby following this meeting.

The New Zealand Dollar (NZD) is set for intense volatility in reaction to the central bank's policy announcements.  

What to expect from the RBNZ interest rate decision?       

The RBNZ is on track to announce a second consecutive 25 bps rate cut in October. However, the swaps market is implying a 30% probability of a bigger 50 bps cut to 2.5%.

RBNZ Governor Christian Hawkesby, during the press conference following the August policy meeting, said that the "OCR projection troughs around 2.5%, consistent with further cuts."

He further noted that the "next two meetings are live, no decisions have been made."

Since then, New Zealand's economic activity has significantly deteriorated. Therefore, a surprise 50 bps rate cut by the central bank this week cannot be ruled out.

However, markets believe that the RBNZ would want to wait for the inflation and employment data before opting for front-loading, as it continues to watch the incoming data.

"One of the key challenges with the RBNZ is its reliance on infrequent data releases. Markets need to wait until 19 October for the crucial third-quarter CPI report, which can steer rate expectations more than any forward guidance at next week's meeting. Third quarter employment data won't be available until 4 November," ING FX Strategist said in his latest research note.

How will the RBNZ interest rate decision impact the New Zealand Dollar?

The NZD/USD pair has paused its recovery just under the 0.5850 barrier heading into the RBNZ event risk. Will the RBNZ trigger a fresh downtrend in the NZD?

That could happen if the central bank lowers borrowing rates by 50 bps or explicitly leaves the door open for a December rate cut by expressing a grim outlook on the economy or any dovish tweaks to the Monetary Policy Review (MPR).

On the other hand, the NZD could see a fresh advance if the central bank hints that it is nearing the end of the rate-cutting cycle.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for NZD/USD and explains:

"From a short-term technical perspective, the Kiwi pair remains vulnerable as the 14-day Relative Strength Index (RSI) turns lower below the midline. The pair has failed to surpass the critical 200-day Simple Moving Average (SMA) at 0.5845 on multiple occasions, suggesting that sellers continue to lurk at higher levels."

"Buyers need acceptance above the aforesaid 200-day SMA barrier to initiate a fresh uptrend. Further up, the confluence zone of the 21-day SMA and the 50-day SMA around 0.5875 will act as a tough nut to crack on the way to 0.5900. The 100-day SMA at 0.5947 will be the last line of defense for sellers. Conversely, a sustained break below the September 26 low of 0.5754 will open the door toward the 0.5700 round level. The next downside cap is seen at the 0.5650 psychological barrier," Dhwani adds.