NZD/USD STICKS TO MODEST RECOVERY GAINS BELOW MID-0.6300S, LACKS FOLLOW-THROUGH

• NZD/USD staged modest intraday bounce from its lowest level since June 2020 touched on Tuesday.
• Softer US bond yields, a positive risk tone undermined the safe-haven USD and extended support.
• Aggressive Fed rate hike bets, fears of a recession should limit the USD downside and cap the major.

The NZD/USD pair held on to its modest intraday recovery gains through the early European session and was last seen hovering near the daily high, just below mid-0.6300s.

The pair showed some resilience below the 0.6300 mark and stage modest recovery from its lowest level since June 2020 touched earlier this Tuesday. The US dollar remained on the defensive amid a softer tone around the US Treasury bond yields. Apart from this, signs of stability in the equity markets further undermined the safe-haven buck and extended some support to the perceived riskier kiwi. That said, the prospects for a more aggressive policy tightening by the Fed helped limit any deeper losses for the buck and kept a lid on any meaningful upside for the NZD/USD pair.

The markets seem convinced that the Fed would need to take more drastic action to combat stubbornly high inflation and have been pricing in a further 200 bps rate hike for the rest of 2022. Apart from this, strict COVID-19 lockdowns in China have been fueling fears about softening global growth and a possible recession. This should help revive demand for the safe-haven greenback and further contribute to capping gains for the resources-linked New Zealand dollar, warranting caution for bulls.

Moreover, investors might also refrain from placing aggressive bets and wait for a fresh catalyst from the latest US consumer inflation figures, due for release on Wednesday. Hence, it will be prudent to wait for strong follow-through buying before confirming that the NZD/USD pair has formed a near-term base and positioning for any meaningful recovery. In the absence of any major market-moving economic data from the US, the US bond yields will influence the USD price dynamics. This, along with the broader market sentiment, should allow traders to grab some short-term opportunities.