The New Zealand Dollar (NZD) has hit a two-year low against the U.S. Dollar (USD), with the NZD/USD pair plunging over 2% in its largest one-day decline since May 2023. The selloff follows bleak economic data from New Zealand and a hawkish stance from the U.S. Federal Reserve, leaving traders to question if .5515 could be the next major support level.

New Zealand’s Economic Freefall

New Zealand’s Q3 GDP report painted a grim picture of the economy. Output contracted by 1%, following a revised 1.1% drop in Q2, far worse than market expectations of a 0.2% decline. Over the past year, the economy shrank 1.5%, tripling earlier forecasts and highlighting the depth of the recession.

Adding to the concerning data, GDP per capita fell 1.2% in Q3, marking the eighth consecutive quarterly decline in this metric. Real gross national disposable income a measure of living standards dropped 0.8% from the previous quarter. This prolonged downturn has amplified pressure on the Reserve Bank of New Zealand (RBNZ) to deliver aggressive monetary easing.

Mounting Bets on RBNZ Rate Cuts

The dismal GDP data has solidified market expectations of further rate cuts from the RBNZ. Following 50bps cuts in both October and November, traders now price in a 91% probability of another 50bps cut in February. Forecasts for 2025 include an additional 100bps in reductions, though the dire economic situation raises the possibility of even more aggressive easing.

Impact of Fed Policy on NZD/USD

The Federal Reserve’s hawkish rate cut earlier this week compounded the NZD’s woes. The Fed’s decision to remove 50bps of projected easing from its 2025 forecast sent shockwaves through markets, and the weak New Zealand GDP report only intensified the downward pressure on NZD/USD. The pair’s steep drop leaves it trading near .5600, a level last seen in October 2022.

Technical Outlook

The technical landscape for NZD/USD remains firmly bearish:

• Support Levels: Immediate focus is on .5600. A break below this level could open the door to .5515, revisiting the October 2022 lows.
• Resistance Levels: On the upside, minor resistance may emerge at .5754, though a return to this level seems unlikely in the near term.
• Momentum Indicators: The RSI (14) is in oversold territory on the daily timeframe, suggesting a potential short-term squeeze. However, MACD signals remain bearish, favoring a continuation of the downtrend.

Trading Strategies

Given the prevailing bearish sentiment, traders are advised to sell into rallies, with potential opportunities near resistance levels. For those looking to counter-trade, clear bottoming signals on shorter timeframes should guide entries, as the risk of a sudden rebound cannot be ignored given the oversold conditions.

Outlook

With New Zealand’s economic outlook deteriorating and the RBNZ likely to ramp up rate cuts, the NZD/USD remains under significant pressure. While oversold conditions may trigger temporary relief, the pair’s long-term trajectory appears firmly downward unless there is a substantial shift in the economic landscape or monetary policy expectations.