NZD/USD rebounds above 0.5750 as Fed easing bets weigh on the Dollar

NZD/USD snaps a five-day losing streak, rebounding toward the 0.5760 area during Asian trading on Friday. The recovery comes as the US Dollar softens amid renewed expectations that the Federal Reserve will deliver two additional interest rate cuts in 2026, improving the near-term outlook for risk-sensitive currencies, including the New Zealand Dollar.

The USD has also been pressured by growing speculation over upcoming changes in Fed leadership. Markets are bracing for US President Donald Trump to nominate a new Fed chair to replace Jerome Powell when his term ends in May, a move widely seen as potentially tilting monetary policy toward a more dovish stance.

The Fed lowered rates by 25 basis points at its December meeting, bringing the target range to 3.50%–3.75%, and delivered a cumulative 75 basis points of easing in 2025 as the labor market cooled and inflation remained elevated.

Fed expectations remain mixed despite dovish bias

According to the CME FedWatch tool, markets are assigning an 85.1% probability to interest rates being left unchanged at the Fed’s January meeting, slightly higher than a week earlier. At the same time, the probability of a 25-basis-point cut has eased to 14.9%, highlighting near-term caution despite the broader expectation of further easing later in the cycle.

The Federal Open Market Committee’s December meeting minutes reinforced this mixed outlook, revealing a degree of division among policymakers. While most officials suggested pausing additional rate cuts could be appropriate if inflation continues to moderate, others argued for keeping rates steady for a period following the three cuts delivered in 2025 to support a weakening labor market.

RBNZ outlook lends support to the Kiwi

On the domestic front, the New Zealand Dollar is finding additional support from shifting expectations around Reserve Bank of New Zealand (RBNZ) policy. Recent economic data showed that the economy rebounded in the third quarter, strengthening the case for a modest recovery after an extended period of softness.

While RBNZ Governor Anna Breman has indicated that interest rates are likely to remain at current levels for some time, improving growth dynamics have led some investors to reassess the balance of risks, offering a modest tailwind to the Kiwi and helping NZD/USD stabilize above the 0.5750 handle.