FX Daily Strategy: Europe, May 27th

The RBNZ has begun to tilt hawkish in their last meeting but has not significantly revise their OCR rate path. They had already expected CPI to overshoot target range in the first half of 2026. But the magnitude maybe greater than expect, especially the energy shock may last longer than their baseline scenario of June. 

The RBNZ kept rates unchanged at 2.25% in the May meeting but on a hawkish 4-3 vote. Governor Breman broke the tie to keep rates at 2.25%. The OCR path is revised significantly higher from February forecast, around 2 hikes higher by year end 2026. They still see inflation returning to target range in mid 2027 but expecting above 4% in 2026. At the same time, the Kiwi could also be supported by improving risk sentiment on a deal being reached in Middle East. Either way, Kiwi's next leg could be higher on any break through.

On the chart, there is little change as prices extend choppy trade above the .5815 low of last week with bounce attempt well contained below the .5900 level. Would need to regain this to clear the way for retest of strong resistance at  the .5930. Above here will revive the upside focus and clear the way for retest of .5990 high and see scope to extend gains from .5680 April current year low. Meanwhile, support at the .5850/.5815 congestion and 29 April low should underpin. Failure, will extend losses from the .5990 high of 6 May and see room to the .5800/.5750 congestion area.

Australian Headline April y/y CPI moderates to 4.2% from 4.6% but RBA preferred trim mean y/y CPI rose to 3.4% from 3.3%. It continues to point towards strong inflationary pressure. The inflationary pressure, however, may not be enough to persuade the RBA to hike further as they take their time to assess the impact of consecutive tightening. Widely expected to end soon, the geopolitical easing would lower the inflationary pressure for Australia from energy price. The softening labor market could also contribute to moderating wage growth. 

Nevertheless, Aussie's movement will be more correlated to broader risk sentiment and precious metal prices. Both sides wanted to end the conflict. Iran is running out of oil storage facility and Trump is facing paramount domestic pressure. There will likely be compromise from both sides to come to an arrangement to at least reopen the Strait of Hormuz. The risk sentiment will be further supported, so as the Aussie.

On the chart, the pair is firm within the .7100/.7200 range but resistance at the .7185/.7200 area keeping gains in check. Would take break here to revive upside focus and see scope to retest the .7278 current year high of 6 May and extend the broader gains from the April 2025 year low towards the .7300/.7400 congestion area. Meanwhile, support at the .7100 expected to underpin. Would take break here to open up room for deeper pullback to retrace rally from the .6833 March low. Lower will see scope to support at the .7055 and .7000 Fibonacci levels.