NZD/USD jumps to three-day highs, 0.7100 mark back in sight

• NZD/USD gained strong positive traction for the second successive day on Monday.
• A combination of factors undermined the USD and remained supportive of the move.
• Hawkish Fed expectations could help limit the USD losses and cap gains for the major.

The NZD/USD pair continued scaling higher through the mid-European session and shot to three-day highs, around the 0.7075-800 region in the last hour.

The pair built on the previous session's bounce from levels just below the key 0.7000 psychological mark and gained some follow-through traction on the first day of a new week. A combination of factors kept the US dollar bulls on the defensive, which, in turn, pushed the NZD/USD pair higher for the second successive day.

The greenback was pressured by Friday's dismal US data, which showed that consumer sentiment plunged to a 10-year low in November amid surging inflation. Apart from this, a fresh leg down in the US Treasury bond yields and the risk-on mood further undermined the greenback and further benefitted the perceived riskier kiwi.

This, along with rising bets for another rate hike by the RBNZ, remained supportive of the NZD/USD pair's ongoing positive move. That said, hawkish Fed expectations might hold back traders from placing aggressive bearish bets around the greenback and keep a lid on any meaningful upside for the major, at least for now.

Investors seem convinced that the US central bank would be forced to adopt a more aggressive policy response to contain stubbornly high inflationary pressures. In fact, the Fed funds futures indicate a 50% probability that the Fed will hike interest rates in July 2022 and a high likelihood of another raise by November next year.

Hence, it will be prudent to wait for a strong follow-through buying before confirming that the recent pullback from multi-month tops has run its course. Market participants now look forward to the US economic docket, featuring the only release of the Empire State Manufacturing Index, for some impetus later during the early North American session.

Technical levels to watch