NZD/USD has been declining for a second consecutive week, gradually slipping toward the base of the 0.59 figure. Notably, this move reflects not so much dollar strength as kiwi weakness. The US dollar index has been fluctuating in a relatively narrow sideways range, underscoring trader caution ahead of a block of US data, including ISM, JOLTS, ADP, and NFP. NZD/USD is therefore falling primarily because of weakness in the New Zealand dollar.

Traders fear that the Reserve Bank of New Zealand will deliver a so-called dovish hike at its upcoming meeting, which takes place tomorrow, September 2. In other words, the RBNZ will raise rates while simultaneously striking a cautious tone and stressing that further tightening will depend entirely on incoming data.

That scenario mirrors the hawkish pause delivered in May. At that time, the central bank kept the OCR at 2.25%, but the decision was effectively made on a knife edge: three members of the committee voted for a 25-basis-point increase, while three voted to leave policy unchanged. The governor's deciding vote favored a pause. At the same time, the central bank adopted hawkish rhetoric, saying that interest rates would likely have to rise over the course of the year and more than previously expected.

In July, the RBNZ acted on those hawkish intentions, lifting the policy rate to 2.5%. However, the language of the accompanying statement had already become noticeably more cautious. Policymakers noted that after the partial reopening of the Strait of Hormuz, global oil prices fell sharply, and with them short-term inflation risks eased.

Even so, the main argument for a further increase on September 2 remains inflation. Annual CPI accelerated from 3.1% to 4.1% in the second quarter, reaching a 2.5-year high and exceeding both the RBNZ's forecast of 3.9% and the upper bound of the central bank's 1–3% target range. Quarterly price growth was 1.5%. However, the structure of that acceleration matters. Prices for tradable goods rose 4.9% year-on-year, while non-tradable inflation slowed to 3.4%, its lowest level in five years. A substantial part of the acceleration in headline CPI was linked to fuel: gasoline rose 27.5% and diesel surged 71.1%. CPI excluding food, household energy, and motor fuel rose only 2.5%. In other words, a large share of the inflation spike reflects an external energy shock rather than uncontrolled domestic price pressure.

That is an important nuance for the coming meeting. On the one hand, a September rate increase looks almost predetermined given the RBNZ's hawkish signals and the trajectory of headline CPI in the second quarter. On the other hand, the path of rates beyond that point is far less clear. Weak domestic demand remains a serious constraint for the RBNZ. According to the latest figures, real retail sales fell 0.5% in the second quarter after rising 0.9% in the previous reporting period. Declines were recorded in 8 of 15 sectors, with especially sharp drops in fuel sales (-13%), automotive goods (-2.3%), accommodation services (-8%), and food services (-2.8%).

Another argument for caution is New Zealand's labor market. Unemployment rose to 5.6% in the second quarter, the highest level since 2015. Employment increased 0.5%, while the underutilization rate climbed to nearly 14% at 13.8%. Annual wage growth was just 2.0%, well below the current inflation rate. Overall, the structure of the data does not point to an overheating labor market.

In other words, the New Zealand economy is receiving an inflation impulse, but one that is largely imported through energy prices, while domestic price pressure remains materially weaker.

Finally, inflation expectations give the RBNZ additional room to preserve a cautious stance. In the central bank's August survey, one-year inflation expectations fell from 3.41% to 2.6%, and two-year expectations declined from 2.53% to 2.34%. Business inflation expectations for one year ahead also fell, from 3.68% to 2.99%. Clearly, easing inflation expectations gives the central bank more flexibility to act less aggressively. When businesses and consumers believe price growth will slow, the risk of a wage price spiral falls materially.

As a result, the fundamental picture looks contradictory. Inflation compels the central bank to act, while weakness in the labor market and consumer demand limits room for further tightening. The most likely outcome of the September meeting is therefore a 25-basis-point OCR increase to 2.75%, accompanied by more cautious signals on the path ahead. The RBNZ will likely confirm that further rate increases remain possible, but it will stress that its decisions depend on incoming data.

Such a scenario will weigh on the New Zealand dollar and, consequently, on NZD/USD. The fact of a rate increase is already largely priced in, so the kiwi will need additional hawkish commentary to strengthen. If the hike is accompanied by dovish signals, the New Zealand dollar will come under significant pressure. In that case sellers in NZD/USD will not only force a break of support at 0.5900, the middle Bollinger Band on the daily chart, but will also test the next price barriers at 0.5870, the Kijun-sen line on D1, and 0.5830, the lower Bollinger Band on the same time frame.