New Zealand's central bank decision to cut interest rates by 25 basis points caused the NZD/USD to surge in the short term, reaching a three-week high. Can the upward momentum continue?

**Central Bank Action and Market Response**

After the Wednesday decision was announced, the Reserve Bank of New Zealand (RBNZ) lowered the official cash rate (OCR) from 2.5% to 2.25%, hitting a new low since mid-2022, and kept the door open for further easing. Following the announcement, the NZD/USD rose over 80 bps to 0.5695, reaching a nearly three-week high.

The RBNZ stated that, due to economic idle capacity, inflation expectations are expected to fall back to around 2% by mid-2026, and the future interest rate path will depend on medium-term inflation trends and economic conditions.

**Easing Cycle Nearing End, Divergence in Central Bank Policies as a Catalyst**

It is noteworthy that after lowering rates by 50 bps last month, the RBNZ signaled continued rate cuts. The recent 25 bps adjustment was already priced in by the market. However, since August last year, the RBNZ has cut rates by more than 3.25%, and with the probability of another 25 bps cut next year being low, investors are beginning to believe that the RBNZ's easing cycle may be nearing its end.

Meanwhile, the market widely expects the Federal Reserve to enter a rapid rate-cutting mode next year regardless of December's decision. The divergence in monetary policy directions between the two countries is a key driver behind the rise in the NZD/USD.

**Long-term Yield Risks to Watch**

However, investors should remain cautious. The 10-year US Treasury yield has fallen to around 4%. Given the ongoing US government debt issuance and the potential for inflation to rise again, investors need to be alert to the possibility that the "term premium" could push long-term US bond yields higher. This factor could offset the upward momentum of the NZD/USD, and whether the rally can sustain in the short term remains to be seen.

**Technical Risks and Key Levels to Watch**

From a daily chart perspective, since breaking below 0.6100 on July 1, the NZD/USD has been in a medium-term downtrend. It remains within a downward channel, indicating that the overall bearish trend has not yet reversed, and the outlook remains bearish. Short-term support is at the 0.5500 level.

A key point to monitor is that if the NZD/USD can effectively hold above 0.5730, then the risk of a trend reversal to the upside will increase significantly. However, before that, the establishment of an upward trend still requires more time and further price confirmation.