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Intraday bias in EUR/CHF remains neutral and further decline is expected with 0.9167 resistance intact. Break of 0.9094 will resume the fall from 0.9264 to retest 0.8979 low. However, firm break of 0.9167 will dampen this bearish view, and bring stronger rise back to retest 0.9264 instead.

In the bigger picture, the rejection by 55 W EMA (now at 0.9252) suggests that the down trend from 0.9928 (2024 high) is still in progress. Firm break of 0.8979 will confirm down trend resumption. Outlook will stay bearish as long as 0.9394 resistance holds, in case of another rebound.

Market Overview

The crypto market capitalisation fell by 1.6% to $2.54 trillion, coming under pressure despite new record highs in US stock indices. This continues the range-bound trading that has persisted for over a month, but the market is now at its lower end. Over the past 24 hours, the top performers were the relatively small-cap Internet Computer (+14.6%), Filecoin (+5.9%) and Cosmos (+4.4%), which were catching up with the latest wave of growth. The biggest declines in our list of the most liquid coins were seen in Near Protocol (-7.8%), Zcash (-6.8%) and VeChain (-4.3%).

The sentiment index has returned to extreme fear territory, falling to 25. As with cryptocurrency market capitalisation, current levels are at the lower end of the range seen since mid-April. If cryptocurrencies are once again acting as a barometer of sentiment in global financial markets, this looks like an early signal of a reversal towards profit-taking. Perhaps investors prefer to take their money off the table ahead of the start of summer, beginning with the riskiest segment.

Bitcoin has fallen below $76K, losing over 2% from Tuesday’s peak, dropping below the 50-day moving average, and cautiously extending Wednesday’s early-session decline. Significant horizontal support that halted the sell-off in May lies near current levels and offers a glimmer of hope for bulls in the near term.

News Background

According to CoinShares, global investment in crypto funds fell by $1.467 billion last week, hitting its lowest level since January. Investments in Bitcoin fell by $1.315 billion (the largest decline this year), and in Ethereum by $223 million. Investments in altcoins rose by $32 million in XRP, $8 million in Solana, $9 million in Near, and $3 million in Sui.

The total outflow of $2.54 billion over two weeks indicates a deepening and broadening flight from risky assets, despite progress in implementing the CLARITY Act, CoinShares notes.

Following the $1.5 billion buyback of its own bonds, Strategy’s total debt has fallen to $6.7 billion. The return on Bitcoin assets per share has risen by 0.7 percentage points since the start of the year to 13.3%. Strategy did not purchase any cryptocurrency last week, but small public companies acquired 602.6 BTC worth approximately $46 million.

Spot Bitcoin trading volumes fell by 10% over the past week, whilst futures open interest dropped by 3.5%, according to Glassnode.

Ethereum continues to show weakness against the backdrop of statements by the project’s co-founder, Vitalik Buterin, regarding a change in the Ethereum Foundation’s (EF) strategy, notes analyst Ali Martinez. The EF plans to reduce its role in the ecosystem and focus on critical tasks.

The total market capitalisation of stablecoins has hit a new all-time high, reaching $323 billion. This figure exceeds the official foreign exchange reserves of 95 countries.

EUR/USD started a downside correction from 1.1650. USD/CHF is rising and might aim for a move toward 0.7880 or 0.7900.

Important Takeaways for EUR/USD and USD/CHF Analysis Today

• The Euro struggled to clear 1.1650 and corrected gains against the US Dollar.
• There is a key bullish trend line forming with support at 1.1630 on the hourly chart of EUR/USD at FXOpen.
• USD/CHF is showing positive signs above the 0.7830 zone.
• There was a break above a connecting bearish trend line with resistance at 0.7830 on the hourly chart at FXOpen.

EUR/USD Technical Analysis

On the hourly chart of EUR/USD at FXOpen, the pair gained pace for a move above 1.1600. The Euro tested 1.1650 and recently corrected gains against the US Dollar.

The pair dipped below 1.1635 and the 38.2% Fib retracement level of the upward move from the 1.1588 swing low to the 1.1652 high. However, the bulls were active above 1.1620. There is also a key bullish trend line forming with support at 1.1630.

The pair is again above the 50-hour simple moving average. Immediate resistance on the upside could be 1.1650. The next key hurdle for the bulls might be 1.1675.

An upside break above 1.1675 might send the pair toward 1.1705. Any more gains might open the doors for a move toward 1.1740. If the bulls fail to push the pair above 1.1650, there could be another bearish reaction.

On the downside, immediate support on the EUR/USD chart might be near the trend line at 1.1630. The next major area of interest could be near the 50% Fib retracement level at 1.1620. A downside break below 1.1620 could send the pair toward 1.1550.

USD/CHF Technical Analysis

On the hourly chart of USD/CHF at FXOpen, the pair declined from the 0.7900 barrier and tested the 0.7810 zone. The US Dollar traded as low as 0.7808 and recently started a fresh increase against the Swiss Franc.

The pair climbed above 0.7820 and the 50-hour simple moving average. There was a break above the 50% Fib retracement level of the downward move from the 0.7903 swing high to the 0.7808 low. Besides, there was a break above a connecting bearish trend line with resistance at 0.7830.

The bulls are now facing hurdles near the 61.8% Fib retracement at 0.7865. The next major area of interest could be 0.7880. The main sell region could be near 0.7900.

If there is a clear break above 0.7900, the pair could start another increase. In the stated case, it could test 0.8000. If there is another decline, the pair might test the 50-hour simple moving average at 0.7835.

The first major support on the USD/CHF chart could be 0.7830. A downside break below 0.7830 might spark bearish moves. The next major support might be 0.7800. Any more losses may possibly open the doors for a move toward 0.7765 in the near term.

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USD/JPY rose to 159.19, with the yen remaining near its one-month lows following comments from Bank of Japan Governor Kazuo Ueda. The regulator warned of rising inflation risks but did not provide any clear signals regarding a potential rate increase at the next BoJ meeting.

Ueda noted the need to closely monitor the impact of high oil prices on inflation in Japan but did not specify how much these factors could influence the regulator's decision in June.

At the same time, BoJ Deputy Governor Ryozo Himino confirmed that the central bank remains ready for further rate hikes. However, the timing and pace of policy tightening will depend on how the Middle East conflict affects the Japanese economy and inflation.

Investors also continue to closely monitor the situation surrounding US-Iran talks. Despite isolated signs of progress in negotiations, ongoing military actions and tensions keep currency markets on edge.

Technical Analysis

On the H4 chart, USD/JPY is trading within a consolidation range around 159.00 and is moving higher towards 159.60. A test of this level is likely, followed by a possible pullback to 159.00. The MACD indicator supports this scenario, with its signal line above zero and pointing firmly upwards, indicating continued bullish momentum.

On the H1 chart, USD/JPY is moving higher towards 159.50. A correction to 159.00 may follow, before a further rise towards 159.60 and potentially 159.90. The Stochastic oscillator confirms this scenario, with its signal line above 50 and pointing firmly upwards towards 80, indicating that short-term upside momentum remains.

Conclusion

USD/JPY continues its upward move as the dollar remains strong amid elevated inflation risks. The yen is hovering near one-month lows after BoJ Governor Ueda warned of rising inflation pressures but stopped short of signalling a near-term rate hike. While Deputy Governor Himino reaffirmed the BoJ's readiness to tighten policy further, the timing remains dependent on how the Middle East conflict impacts Japan's economy and inflation. Meanwhile, uncertainty persists around US-Iran negotiations, with isolated progress offset by continued military tensions. Technically, further upside towards 159.60–159.90 appears likely, with intervention risks remaining a key factor as the pair approaches psychologically significant levels.

EUR/CAD extended its near term rally today as increasingly hawkish rhetoric from senior European Central Bank officials continued pushing markets toward pricing a June rate hike, while falling oil prices added renewed pressure on Canadian Dollar. The pair resumed its rebound from 1.5941 and is now approaching the key 1.6148 resistance zone, with broader momentum increasingly favoring further upside.

The Euro side of the equation has been driven by a coordinated shift in ECB communication this week. French ECB Governing Council member Francois Villeroy de Galhau said today that policymakers would “do what is necessary to bring inflation back to 2% in the medium term,” while emphasizing the need to prevent energy-driven inflation from feeding into broader pricing behavior. “We should be extremely vigilant about possible second-round effects,” Villeroy said, adding, “have no doubt we will act as much as necessary.”

Those comments reinforced already hawkish signals from ECB Chief Economist Philip Lane and Executive Board member Isabel Schnabel earlier this week. Lane signaled that the ECB is preparing another upward revision to inflation forecasts and indicated policymakers are comfortable with current market pricing for tighter policy. Schnabel took an even firmer stance, arguing that “looking through is no longer an option” and stating directly that “a rate hike in June will be needed.”

Meanwhile, Canadian Dollar continues losing support from oil markets as hopes for a US-Iran agreement and reopening of the Strait of Hormuz weigh heavily on crude prices. With Brent crude falling sharply from last week’s highs to the mid-$90 area. Markets are also firmly expecting the Bank of Canada to remain on hold for the rest of the year.

Technically, EUR/CAD's rise from 1.5914 extends today and it's on track to 1.6148 resistance. Firm break of 1.6148 will solidify the case that near term consolidation from 1.6247 has completed, and rise from 1.5610 is ready to resume. Break of 1.6247 will target 61.8% projection of 1.5610 to 1.6247 from 1.5941 at 1.6335 next. Nevertheless, below 1.6036 minor support will delay the bullish case and bring more sideway trading first.

Minneapolis Fed President Neel Kashkari warned that inflation risks are becoming increasingly concerning as the Middle East conflict continues pushing energy and supply-chain costs higher across the global economy. Speaking in Tokyo, Kashkari said “most of the data has said the inflationary risks are higher, not lower.".

Kashkari argued that the persistence of elevated inflation over recent years is making the Fed less willing to simply dismiss the current energy shock as temporary. “We've had high inflation all around the world for five years now,” he said, adding that the Iran conflict is “affecting virtually every economy around the world.” He also stressed that rising energy costs are likely to spread gradually into other sectors of the economy, warning that “the inflationary shockwave” from the conflict could persist longer than markets currently expect.

Importantly, Kashkari suggested inflation concerns currently outweigh labor-market risks for policymakers. While he described the US labor market as being “in a decent place,” he said “the risk to inflation appeared to be higher than the risk of a worsening labour market.” He also warned that failing to respond appropriately to persistent inflation pressures could damage the Fed’s credibility, saying policymakers risk fueling public perceptions that the central bank is not serious about restoring price stability.

Still, Kashkari stopped short of endorsing imminent rate hikes despite growing market pricing for a possible October move. “I think it's far too soon for me to make such a prediction,” he said when asked about hike expectations. Instead, he reiterated that the Fed should maintain “neutral guidance” signaling rates could still move either higher or lower depending on incoming data, particularly developments surrounding Iran negotiations, energy markets, and global supply-chain normalization.

At the start of the week, the US currency continues to trade near significant levels amid ongoing uncertainty surrounding negotiations between the United States and Iran. Markets are closely monitoring reports suggesting a possible prolongation of the negotiation process and an increased US military presence in the Middle East, both of which are supporting demand for safe-haven assets, including the dollar.

Additional support for the US currency comes from rising US Treasury yields and expectations surrounding upcoming macroeconomic data releases, which could influence further market expectations regarding Federal Reserve policy.

At the same time, the dollar’s movement remains mixed. Despite the recent strengthening of USD/JPY and USD/CAD, both pairs have approached important technical resistance levels, where buying activity is beginning to slow. The market is now assessing whether the current momentum can develop into a broader continuation of dollar strength, or whether the advance in the US currency will remain merely a short-term reaction to geopolitical risks.

USD/JPY

Buyers in USD/JPY have managed to establish the pair above the key 159.00 level. If the 158.70–159.00 range retains its status as support, further growth towards 159.80–160.20 remains possible. A loss of this zone could trigger a downward correction towards 158.00–157.80.

Key events for USD/JPY:

• today at 11:00 (GMT+3): speech by Dallas Fed representative Lorie K. Logan;
• today at 15:15 (GMT+3): US ADP non-farm employment change;
• tomorrow at 02:50 (GMT+3): foreign investment in Japanese equities.

USD/CAD

USD/CAD is also trading within a range after reaching major resistance near 1.3800. Should strong US data be released or demand for the dollar remain firm, the pair may consolidate above 1.3820 and continue rising towards 1.3870. Conversely, weaker interest in the US currency could push the pair below 1.3800 and towards the 1.3750–1.3770 area.

Key events for USD/CAD:

• today at 15:30 (GMT+3): Canadian wholesale sales data;
• today at 23:30 (GMT+3): weekly US crude oil inventories from the American Petroleum Institute (API);
• tomorrow at 15:30 (GMT+3): Canada’s current account balance.

Overall, the dollar continues to retain an advantage amid geopolitical uncertainty and expectations of fresh macroeconomic signals from the United States. Nevertheless, the approach of USD/JPY and USD/CAD towards key technical resistance levels increases the likelihood of the current momentum slowing, while the next directional move will largely depend on incoming US economic data and developments surrounding negotiations between the US and Iran.

Trade over 50 forex markets 24 hours a day with FXOpen. Take advantage of low commissions, deep liquidity, and spreads from 0.0 pips (additional fees may apply). Open your FXOpen account now or learn more about trading forex with FXOpen.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

Markets

US and UK markets reopened yesterday after long weekend, allowing room for some repositioning to Monday’s bond and stock rally on enthusiasm on a US-Iran deal. European bond markets underperformed with curves bear steepening on the back of ECB comments. ECB board member Schnabel backs a June rate hike even with a peace deal in place by then. She especially stresses the persistence of the shock which lasts longer than the ECB’s adverse scenario from March. Schabel’s interview – “a large an persistent shock”- is the first thing you when opening the ECB’s website. An interview by chief economist Lane, also published yesterday, was less outspoken. Like ECB President Lagarde over the weekend, he hinted at upward revision to inflation forecasts. He also added that the central bank expects indirect effects beyond energy prices in what could also be considered as a hint toward more imminent policy action. The market implied probability of June action ticked up yesterday in lockstep with front-end yields, hitting 90%. A speech by ECB President Lagarde and minutes of the April ECB meeting (on which a rate hike was discussed) could offer more clues tomorrow. Eco data were yesterday limited to May US Conference Board consumer confidence which edged downward (93.1 from 93.8) as the inflationary impacts of the war in the Middle East intensified. Consumer appraisals of current business conditions and the current labor market were moderately less positive and outweighed modest improvements in consumers’ expectations six months from now. Consumers’ average and median 12-month inflation expectations ticked downward but remained elevated at respectively more than 6% and more than 5%. Markets didn’t respond to the release. Overall, trading developed in an orderly way as Brent crude for most of the day managed to hold (just) below the $100/b mark. On US stock markets, a huge outperformance of Micron helped the Nasdaq to a 1.2% gain and a minor intraday all-time high. The dollar is going nowhere, holding between EUR/USD 1.16 and 1.1650. Today’s eco calendar is thin, suggesting any Iran-related headlines will drive intraday price action.

News & Views

The Reserve Bank of New Zealand (RBNZ) left its policy rate unchanged at 2.25% as widely expected. However, the decision was a very close call. Three members preferred to raise the policy rate by 25 bps. Three other members voted to still keep policy unchanged. Governor Breman was in the unchanged camp and casted the decisive vote. The MPC assesses that inflation will probably rise to 4.3% in the September quarter from 3.1% in Q1. This rise in in inflation occurs even as economic activity and spending is weakening. For some firms, rising costs are squeezing profit margins and curbing investment and hiring intentions. Consumer confidence has fallen sharply, and the housing market remains weak. Even as weak activity is seen dampening inflationary pressures in the medium term, the MPC concludes that the OCR will most likely need to increase sooner and by more than envisaged in February. Data in the new monetary policy statement suggest that the policy rate might average 2.5% in Q3, 3.1% next year to reach 3.3% at the end of the policy horizon. The RBNZ predicts growth stabilizing in Q2 followed by a modest 0.2% in Q3. They forecast average growth for this and next year at 0.7% and 1.7% respectively. The New Zealand 2-y government yield adds 4.5 bps to 3.54%. Money markets discount an 80% probability of a July rate hike. The kiwi dollar rises from the NZD/USD 0.584 area to currently trade near 0.5875.

Australian April CPI inflation data this morning showed a mixed picture. Headline inflation printed at 0.4% M/M and 4.2% Y/Y, down from 4.6% in March. However, trimmed mean annual inflation rose further to 3.4% from 3.3% in March. Of the 11 groups in the CPI, 7 have experienced a slowdown in annual growth from last month with transport prices moderating the most. Automotive fuel prices declined 7% M/M, as this fall includes a halving of the fuel exercise duty on April. The statistics agency assesses that the impact of higher oil prices filtered through to products and services with high freight and logistics costs. Annual housing inflation was 6.3% in the 12 months to April. This reflects rising costs for electricity, new dwellings and rents. The 2-y government bond yield eases slightly this morning (-5 bps to 4.54%). Markets attach an 80% to the scenario where the RBA still raises the policy rate by an additional 25 bps by year-end. The Aussie dollar eases marginally this morning (AUD/USD 0.715).

In focus today

Today is quiet in terms of data releases. Focus remains on developments between the US and Iran and implications on markets.

Economic and market news

What happened overnight

In New Zealand, the Reserve Bank decided to maintain its cash rate at 2.25%, in line with market expectations. Despite holding rates steady, policymakers signalled that they will most likely need to increase rates sooner than envisaged in the February Monetary Policy Statement, with revised forecasts implying at least two more hikes by the end of the year.

What happened yesterday

In the US-Iran war, Iran condemned the US attacks on Iranian vessels and missile launch sites on Monday evening, arguing that they were a violation of the ceasefire. Iran's Revolutionary Guard reserved the right to retaliate. Despite the escalating tensions, back-channel talks between the two sides appear to continue, with both parties believed to be seeking a diplomatic resolution. Signs of normalisation are also emerging domestically, as Iran began restoring public internet access after one of the world's longest nationwide blackout periods.

In Sweden, April PPI increased 1.1% m/m and 4.7% y/y, up from 2.0% y/y in March, largely reflecting higher energy prices as expected. Export prices increased 2.5% m/m and import prices 3.3% m/m, with the main driver in the latter being higher crude oil prices. Domestically, prices fell but were offset by higher prices for refined petroleum products, as well as plastics, metals and motor vehicles. Looking ahead, further PPI increases are anticipated, driven by continued price pressures and ongoing supply disruptions.

In Hungary, the National Bank of Hungary held its base rate unchanged at 6.25%, as expected, with signals of easing ahead. A strengthening forint, buoyed by Péter Magyar's election as Prime Minister, has supported a favourable inflation outlook, contrasting sharply with inflation pressures in other EU countries.

Equities: Equities were generally higher yesterday, with US in catch-up from holidays. S&P500 up 0.6% but small cap Russell 2000 the standout, up 1.8%. It is rare to see small caps performing so strong in what many perceive as a narrow tech rally (16% vs S&P500 10% ytd). Especially, as consensus has turned from rate cuts to rate hikes over the last months. However, we continue to like small caps. Although tech took the attention in the last earnings season, the rest, "S&P 493" delivered the strongest earnings growth since 2021. Earnings are turning, macro support even higher earnings growth ahead and valuation is attractive.

This was another hot day for momentum stocks, up 3.4% in one go. Tech did the bulk of this, with Micron rallying 19% (!) after UBS tripled its price target. The chip frenzy is continuing in Asia this morning with Kospi up 4%. Samsung the standout, having reached a deal with workers this morning and averting the 18-day strike. This is actually good news for everyone, as a strike would have amplified the chip shortages even further. US and European futures are slightly higher this morning.

FI and FX: Brent oil is declining somewhat overnight from yesterday's peak of USD 100.5/bbl down to USD 98/bbl. Given the more limited move, US yields are also trading somewhat lower overnight with the 2Y UST at 4.015% and the 10Y at 4.47%. EUR/USD continues trading in a narrow range just above 1.16. In Norwegian markets we are beginning to see a reverse price action in FX relative to USD moves; when the USD strengthens the NOK does poorly and vice versa. RBNZ kept rates on hold at 2.25% as expected, but in a split decision where Governor Breman had the casting vote to keep rates on hold as three members voted for a hike. The NZD strengthened on the decision and front-end yields rose, as the bank signalled that the policy rate most likely will need to rise more and sooner than previously thought. Today's macro data calendar is thin.

• As widely expected, the RBNZ held the OCR at 2.25%.
• The three internal members voted for no change – including the Governor, with her casting vote – and the three external members voted for a 25bp hike.
• The RBNZ’s revised OCR forecast signals three 25bp OCR increases in 2026 and a further modest lift in 2027.
• The RBNZ has significantly revised down its outlook for growth, but risks are viewed as still skewed to the downside.
• The RBNZ has revised up its forecast of inflation to a peak of 4.3% in Q3 2026. While inflation is forecast to return to 2% in mid-2027, risks are viewed as skewed to the downside.
• Westpac continues to expect that the OCR will remain unchanged in July, and that it will be increased in September, October and December. Our medium-term OCR forecast remains unchanged.
• The delay in beginning the tightening cycle increases our confidence that the OCR will need to rise to 4.25% ultimately before inflation is sustainably returned to 2%. The Governor appears keen to wait until the RBNZ sees the “whites in the eyes” of core inflation before responding. That inevitably means the RBNZ will be late to the party.

Key take out: OCR rising in 2026, but a July start remains in the balance.

As widely expected, the RBNZ held the OCR at 2.25% and a vote was required to determine the outcome. Also as expected, the RBNZ’s revised projections include a pulling forward of the timing of projected policy tightening. The end 2026 OCR forecast was lifted to 2.84% - close to our 2.8% expectation.

The MPC seems finely balanced in terms of the start of the tightening cycle, but united in the view that the OCR rises towards 3% by the end of this year. Also, there is a strong sense that the OCR will ultimately need to increase to the low 3’s.

With a 3:3 split in the MPC the onus possibly falls to the internals and effectively the Governor to get over the line for a hike. These members are looking for evidence of increased core inflation, along with signs of pressure on wages and inflation expectations. We don't think the RBNZ will get meaningful information on that until just before the September meeting.

The other key factor is the progress of the war, which perhaps suggests this dovish group thinks that things might be resolved soon, allowing more room to wait. We think they will be disappointed there.

Another issue is the path of the data, with dovish members noting some data was weaker than expected. Looking ahead, our Q2 GDP forecast is -0.3% vs their 0%, so there is some scope for disappointment there. The Record of Meeting explicitly notes that the Committee sees the risks are to the downside for domestic growth. Neutral rate estimates were revised up perhaps more than we thought, but clearly laying the basis for increased rates soon enough.

The main fly in the ointment of this argument is the potential for a new MPC member be appointed – expected in June – and hence their view might be influential. Having said that, one wonders if a brand-new member will be keen on deviating from their internal colleagues’ opinion in that first meeting.

The bottom line is that the OCR is rising in 2026 and looks set to end 2026 at the 3% level we currently forecast. We are not convinced that the OCR will increase in July, given the lack of evidence we think will be available on core inflation, wages and long-term inflation expectations pressures. The Governor emphasized the role of long term 5–10-year inflation expectations in her assessment that expectations remain well anchored. Information on these indicators will not be available before the July meeting. Hence the thesis the RBNZ will wait to see the “whites of the eyes” of persistent inflation pressures remains the base case.

The RBNZ makes a strong case for a higher OCR this year but is delaying action. That’s unfortunate and does confer risks of a turnaround in the future and increases confidence that we will need to see 4% plus interest rates before CPI inflation is brought to heel. However, the Governor’s vote today was in line with her previous messaging which strongly suggested a high bar to consider lifting the OCR today. It seems sensible to assume she will continue to pursue that strategy. The big surprise was that it was the external members that have swung decidedly hawkish. That’s telling but the internal consensus needs to flip to get the tightening cycle going.

The RBNZ’s OCR projection has been revised higher and now peaks at 3.28% in June 2029 (their previous forecasts from February rose more gradually, peaking at 3% in 2029). There were also upward revisions to the RBNZ’s forecasts for the “short-term” and “forecast horizon” measures of the neutral level of the OCR (the “long-run” measure was unrevised).

The upward revision to the RBNZ’s OCR profile reflects the sharp rise in inflation pressures stemming from the Middle East conflict. While the recent rise in fuel prices is expected to be temporary, there are expected to be longer lasting pricing impacts that will add to the pressure on inflation at medium term horizons. The evolution of wage and price setting behaviour was noted as expected to be a key influence on how quickly the OCR will rise.

The RBNZ’s forecasts for the OCR in 2026 are similar to our own. However, after early 2027 the RBNZ’s forecasts rise more gradually compared to our own (as we expected).

Westpac’s OCR call.

We continue to expect no change in the OCR in July and 25bp hikes in September, October and December. Our longer-term OCR forecasts remain unchanged.

A July hike can’t be ruled out and probably hinges on the strength of the economy and the assessment of the level of excess capacity that comes to light between now and July. We suspect their concerns on further downside risks will be borne out.

We may get some additional colour from the Governor on the likelihood of a July hike in her post Statement media appearances.

RBNZ forecast detail.

Overall, the RBNZ’s forecasts for economic conditions are similar to our own.

On inflation, the RBNZ expects inflation will peak at 4.3% this year. That’s just slightly lower than our forecast for a peak of 4.5%. However, given the volatility in oil prices and broader ructions in the global economy, it’s not a major difference.

The RBNZ expects that inflation will drop back next year when oil prices eventually ease, and their forecast show annual inflation settling comfortably at 2% from mid- 2027. In contrast, we think that inflation could fall back more sharply next year. But that’s due to swings in oil prices, rather than a difference in views on underlying economic conditions.

However, while we see more downside risk for imported inflation next year, we continue to think the RBNZ is underestimating the upside risk for non-tradables prices (and hence overall inflation) at longer horizons. Despite a modest upwards revision to the RBNZ’s nontradables inflation forecasts, they still settle at relatively benign levels. In contrast, we expect the continued large increases in council rates and other administered prices will keep domestic inflation at firmer levels for an extended period. That risk has been compounded by the recent increases in global oil prices and other input costs.

On activity, the RBNZ’s forecast for GDP growth, the labour market and the output gap are all broadly similar to our own. Forecasts for GDP growth have been revised down. Higher living costs are expected to be a drag on household spending. Similarly, the downturn in economic conditions is expected to dampen hiring and investment spending by businesses. That softness in demand is expected to offset some of the upward pressure on consumer prices, but not enough to prevent a sharp lift in inflation in the near term.

Alternative scenarios.

We’re not surprised to see that the RBNZ considered multiple scenarios around the outlook for the economy, given the current uncertainty stemming from the Middle East conflict. The focus of these scenarios, though, was the uncertainty around how economic activity and inflation might respond, rather than the path of oil prices per se.

• In the first scenario, the conflict lasts longer than assumed in the central projection, with Dubai crude oil prices reaching $120/bbl, holding there over the rest of this year, and only falling back as far as $100/bbl in later years. Firms respond by pre-emptively raising their prices in a coordinated manner, along the lines of the model that external MPC member Gai set out in his recent speech. Annual inflation peaks at 5.8%, and the OCR needs to rise faster and further to bring inflation back to target.
• The second scenario assumes the same oil price track as above, but with more restrained pricing behaviour by firms. Inflation does spike to around 5% in the near term, but does not become as persistent, and the OCR does not need to rise much more than in the baseline projections.
• The third scenario assumes the same oil price track as in the baseline forecasts, but with a larger negative demand shock for the global and domestic economies. Inflation initially spikes to around 4% but falls back within the target range more quickly as firms struggle to pass on higher costs, and the OCR remains on hold at 2.25% for some time to combat a further deterioration in demand.

The value of these scenarios is not in trying to predict exactly how things will pan out, but to convey the RBNZ’s response function under a range of different conditions. With that in mind, what can we take from these? One key takeout is that the policy responses are asymmetric in terms of time horizons. Under the first two scenarios, the OCR track doesn’t diverge much from the baseline projection until late 2026 or early 2027, as it takes time to determine whether second-round price effects are occurring beyond the initial oil price shock. In contrast, the weak demand scenario has an immediate impact – the OCR track allows no possibility of a hike in July, September, or any time soon. If we’re in the scenario 3 world, this will likely become apparent from the activity data over the next couple of months.

Notably, the RBNZ has only explored scenarios where oil prices are either in line with or higher than their central forecast. That leaves open the question of how the RBNZ would respond to a favourable oil price ‘shock’ – indeed, oil prices are currently below the RBNZ’s central projection, which would have been finalised a week ago. Presumably a sustained pullback in oil prices would bring the RBNZ somewhere closer to its pre-conflict view of the world – with the economy gradually recovering and the OCR eventually being raised to a more ‘neutral’ level.

Key things to watch ahead of the RBNZ’s 8 July OCR Review.

The next RBNZ policy review will take place on 8 July. A key focus between now and then will be on developments in the Middle East, and their impact on trading partner growth and key export and import commodity prices. The RBNZ’s scenarios seem to focus on the idea of higher for longer oil prices. While we think that’s appropriate, if oil prices shift by enough to bring down inflation forecasts significantly then this might assuage concerns of inflation persistence a bit.

The domestic data flow between now and then is relatively light. The most important domestic economic releases are:

• The Q1 GDP report (18 June): While this data largely predates the Middle East conflict, the outcome will be compared to the RBNZ’s estimate, with any deviation having implications for the RBNZ’s estimate of the output gap. The RBNZ’s forecast of 1.0% growth is slightly firmer than our own view (0.8%q/q).
• The May Selected Price Indexes (16 June): With the Q2 CPI report not released until 21 July, the RBNZ will have limited pricing data with which to assess whether inflation is beginning to broaden beyond the firstround direct impact of higher energy prices.
• The April and May filled jobs reports (28 May and 29 June): With the next Household Labour Force Survey not due until 5 August, the Monthly Employment Indicator will provide insight as to whether renewed business sector caution is spilling over into greater labour market slack.

In addition to the above, key monthly indicators such as the BusinessNZ manufacturing and services indexes (mid- June) and the ANZ Business Outlook survey (end of May and June) will also be of interest. The next QSBO survey is not released until 14 July, although it is possible that the RBNZ will receive a heads-up on how this is shaping up prior to the 8 July policy decision. Developments in retail spending and housing-related indicators will also be monitored to judge the how the energy price shock is impacting activity. The RBNZ will also monitor movements in key export commodity prices and financial conditions.

Notable quotes.

Some notable quotes from the today’s RBNZ commentary were as follows:

Current state of the economy

“ Domestically, business contacts and surveys indicate weaker confidence and spending. For some firms, rising costs are squeezing profit margins and curbing investment and hiring intentions”

“ Indicators of economic activity have deteriorated, in some cases more quickly than anticipated.”

The Middle East

“ The Committee noted that the outlook for energy prices depends on how the conflict evolves, the extent of damage to energy infrastructure in the Middle East, and the speed with which global supply chains adjust.”

“ Members noted that these events will encourage firms to permanently reconfigure their supply chains to reduce exposure to the region. Along with stronger global demand for renewable energy, this may place further upward pressure on global energy prices in the near term.

Growth outlook

“ Near-term economic activity is likely to be weaker than assumed…”

“ Annual GDP growth in 2026 is now expected to be 0.9 percentage points lower…”

“ The balance of risks is… to the downside for growth.”

Output gap/excess capacity

“ Unemployment remains elevated, indicative of spare capacity in the labour market.”

“ Spare capacity in the economy is likely to dampen second-round inflationary pressure.”

Inflation outlook

“ Inflation is expected to peak at 4.3 percent in the September quarter…and to return to the 2 percent target mid-point in mid-2027.”

Inflation expectations

“ Medium- to long-term inflation expectations remain consistent with inflation returning to the 2 percent target mid-point…”

“ While shorter-term inflation expectations have increased, medium- to longer-term expectations remain close to 2 percent.”

Current policy stance

“ Financial conditions have tightened materially this year…”

Risks to the inflation outlook

“ The balance of risks is to the upside for inflation…” Global growth

“ New Zealand’s trading partners are expected to see weaker growth and higher inflation.”

“ The Middle East conflict poses downside risks to global economic activity.”

Outlook for monetary policy

“ The OCR will most likely need to increase sooner and by more than envisaged…”

“ All Committee members agreed that increasing the OCR at upcoming meetings would likely be necessary…”

“ The pace of OCR increases will depend on… wage- and price-setting behaviour versus weaker economic activity…”