NZD/USD rises slightly as risk sentiment improves, RBNZ rate cut looms

• The New Zealand Dollar edges, supported by a mild improvement in risk appetite.
• Expectations of a December rate cut by the RBNZ continue to cap the Kiwi's upside potential.
• The US Dollar remains cautious as Congress is set to vote today on the funding bill to end the government shutdown.

NZD/USD hovers around 0.5660 on Wednesday at the time of writing, up 0.15% on the day. In New Zealand, a sluggish economic outlook continues to fuel speculation about a potential rate cut by the Reserve Bank of New Zealand (RBNZ). The Inflation Expectations report released on Tuesday remained unchanged at 2.8% for the fourth quarter, while labor market data confirmed a slowdown as job creation stalled in Q3 and the Unemployment Rate rose to 5.3%, its highest in nine years.

Against this backdrop, markets are now pricing in a high chance of a 25-basis-point cut in December, which would bring the cash rate down to 2.25%, with a small chance of a deeper 50-basis-point reduction.

Across the Pacific, the US Dollar (USD) is also struggling to capitalize on the Kiwi's weakness. Recent private-sector employment data pointed to a deterioration in the US labor market, with businesses cutting an average of 11,250 jobs per week in late October, according to an ADP report. These figures have reinforced expectations that the Federal Reserve (Fed) could deliver a rate cut in December.

Slight progress in Washington, as the US House of Representatives prepares to vote on a bill to end the government funding deadlock later in the day, has modestly improved risk sentiment but has not provided a meaningful lift to the Greenback. The US Dollar Index (DXY) trades around 99.45, after an earlier rebound toward 99.71, as investors await the government's reopening and the release of delayed economic data to refine their expectations for the Fed's monetary policy path.

Overall, NZD/USD remains stuck in a waiting phase, as markets balance the risk of a New Zealand recession against persistent signs of weakness in the US economy. Any confirmation of a dovish turn by either the RBNZ or the Fed could redefine the pair's trajectory in the coming weeks.