NZD/USD surrenders modest intraday gains, hangs near daily low around 0.6630 area

• NZD/USD struggled to capitalize on its early uptick amid a strong pickup in the USD demand.
• A fresh leg up in the US bond yields turned out to be a key factor that underpinned the USD.
• A softer risk tone also benefitted the safe-haven buck and capped the perceived riskier kiwi.

The NZD/USD pair surrendered its modest intraday gains and retreated to the lower end of its daily trading range, around the 0.6630 region during the early European session.

The pair built on the previous day's positive move and gained some follow-through traction during the first half of the trading on Tuesday, though resurgent US dollar demand capped the upside. The prospects for a faster policy tightening by the Fed triggered a fresh leg up in the US Treasury bond yields. This, in turn, was seen as a key factor that provided a strong boost to the greenback.

In fact, the markets have been pricing in the possibility of a full 50 bps rate hike at the March FOMC meeting and pushed the yield on the benchmark 10-year US government bond closer to the 2% threshold. Adding to this, the yield on the 2-year and 5-year US notes – which are highly sensitive to rate hike expectations – rose to the highest level since February 2020 and July 2019, respectively.

Apart from this, the prevalent cautious mood – as depicted by a softer tone around the equity markets – further benefitted the safe-haven greenback and acted as a headwind for the perceived riskier kiwi. The downside, however, seems cushioned, at least for the time being, as investors might refrain from placing aggressive bets ahead of Thursday's release of the latest US consumer inflation figures.

The US CPI report would determine the Fed's policy outlook and provide a fresh directional impetus to the NZD/USD pair. In the meantime, the US bond yields will play a key role in influencing the USD price dynamics amid absent relevant economic releases from the US. Apart from this, the broader market risk sentiment would produce short-term trading opportunities around the NZD/USD pair.

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