NZD/USD CLINGS TO GAINS AMID MODEST USD WEAKNESS/RISK-ON IMPULSE, REMAINS BELOW 0.6300

• NZD/USD staged an intraday recovery from a near one-month low amid modest USD weakness.
• Retreating US bond yields, the risk-on impulse undermined the buck and extended some support.
• Aggressive Fed rate hike bets should help limit the USD losses and cap the upside for the major.

The NZD/USD pair attracted some buying near mid-0.6200s amid modest US dollar downtick on Tuesday and recovered a part of the overnight slump to a near one-month low. The pair held on to its intraday recovery gains through the early European session and was last seen trading just a few pips below the 0.6300 round-figure mark.

Having scaled a two-decade peak on Monday, the US dollar witnessed some profit-taking amid retreating US Treasury bond yields. Apart from this, a turnaround in the global risk sentiment – as depicted by a generally positive tone around the equity markets – further undermined the safe-haven greenback. This, in turn, was seen as a key factor that extended some support to the NZD/USD pair.

That said, any meaningful recovery seems elusive amid firming market expectations for a more aggressive policy tightening by the Fed. The red-hot US consumer inflation figures released on Friday fueled speculations that the Fed would raise rates at a faster pace than expected. In fact, Fed funds futures indicate the possibility of at least one jumbo 75 bps rate hike by the September meeting.

Moreover, investors now expect the officials to raise rates to nearly 4% by next spring, up from last month’s expected peak of around 3%. This should continue to act as a tailwind for the US bond yields and the USD. This, in turn, might hold back traders from placing fresh bullish bets around the NZD/USD pair, warranting some caution before confirming that a near-term bottom is in place already.

Hence, the market focus will remain glued to the outcome of a two-day FOMC monetary policy meeting, scheduled to be announced on Wednesday. The Fed decision will influence the USD and help determine the near-term trajectory for the NZD/USD pair. In the meantime, the US bond yields will drive the USD demand, which, along with the broader market risk sentiment might provide some impetus.