New Zealand Dollar under pressure as Oil, Fed hike bets lift US Dollar

NZD/USD trades around 0.5880 on Tuesday at the time of writing, virtually unchanged on the day with a 0.03% decline. The pair remains under pressure as the US Dollar (USD) benefits from safe-haven demand amid geopolitical tensions and renewed expectations of monetary tightening in the United States (US).

Uncertainty surrounding the Strait of Hormuz remains at the center of market attention. Qatar said on Tuesday that negotiations between Iran and Oman over the reopening of the strategic waterway have reached an advanced stage and that it has received positive feedback from both sides. Doha stressed, however, that the talks are at a critical juncture, keeping investors cautious about the prospect of a swift agreement.

Tehran also maintains several conditions for reopening the strait, including the payment of war reparations by Washington, the lifting of sanctions, the release of frozen Iranian assets, an end to military threats and the removal of the US naval blockade. Iran has also ruled out the prospect of renewed direct negotiations with US President Donald Trump before the end of his term in January 2029.

This geopolitical uncertainty supports energy prices and revives concerns about US inflation. West Texas Intermediate (WTI) trades around $82.10 and remains more than 6% higher since the beginning of the week. Higher Oil prices are also helping to keep US Treasury yields elevated.

Against this backdrop, investors are increasing their expectations of further monetary tightening by the Federal Reserve (Fed). According to the CME FedWatch tool, markets now assign around a 50% chance to a 25-basis-point interest rate hike at the September meeting, up from approximately 42% on Friday.

Comments from Cleveland Fed President Beth Hammack are also fueling these expectations. Hammack believes that current monetary policy is not sufficiently restrictive and that several rate hikes could be necessary to bring inflation sustainably back toward the central bank’s target.

Investors now await the release of the US Consumer Price Index (CPI) on Wednesday, which could provide fresh clues about the Fed’s interest rate path. Until then, developments surrounding negotiations over the Strait of Hormuz and Oil prices are likely to continue influencing the US Dollar and, consequently, NZD/USD.

On the New Zealand side, higher energy prices are also complicating the monetary policy outlook. Markets remain cautious ahead of New Zealand’s third-quarter inflation expectations data after price pressures unexpectedly accelerated in the second quarter. The figures could influence expectations surrounding the Reserve Bank of New Zealand’s (RBNZ) next policy decision in September.

Domestic political uncertainty is another factor to watch for the New Zealand Dollar (NZD). New Zealand Prime Minister Christopher Luxon has called an urgent caucus meeting for Wednesday as speculation surrounding a potential challenge to his leadership intensifies.