NZD/USD reclaims 0.6300 mark amid modest USD weakness, upside seems limited

• NZD/USD stages an intraday recovery from mid-0.6200s amid a modest USD downtick.
• A positive risk tone undermines the safe-haven buck and benefits the risk-sensitive Kiwi.
• Hawkish Fed expectations should limit the USD losses and cap the upside for the major.

The NZD/USD pair attracts some buying in the vicinity of mid-0.6200s on Thursday and reverses a part of the previous day's slide to its lowest level since January 6. The steady intraday ascent lifts spot prices to a fresh daily high, around the 0.6300 mark, during the first half of the European session, albeit lacks bullish conviction.

The US Dollar (USD) retreats from a six-week high touched on Wednesday amid a modest downtick in the US Treasury bond yields and turns out to be a key factor lending some support to the NZD/USD pair. Apart from this, a generally positive tone around the equity markets further undermines the safe-haven Greenback and benefits the risk-sensitive Kiwi. That said, the prospects for further policy tightening by the Fed should act as a tailwind for the US bond yields and limit losses for the USD.

Investors now seem convinced that the US central bank will stick to its hawkish stance for longer amid stubbornly high inflation. In fact, the markets are currently pricing in at least a 25 bps lift-off at each of the next two FOMC meetings in March and in May. Moreover, several FOMC policymakers, including Fed Chair Jerome Powell, recently stressed the need for additional interest rate hikes to fully gain control of inflation. This supports prospects for the emergence of some USD dip-buying.

Hence, it will be prudent to wait for strong follow-through buying before confirming that the NZD/USD pair's recent pullback from its highest level since June 2022 has run its course. Market participants now look to the US economic docket, featuring the Producer Price Index (PPI), the usual Weekly Initial Jobless Claims, the Philly Fed Manufacturing Index, Building Permits and Housing Starts. This, along with the US bond yields, will influence the USD and provide some impetus to the major.

Technical levels to watch