NZD/USD retreats from weekly high amid risk-off, seems vulnerable near 0.5700 mark

• NZD/USD struggles to capitalize on its early modest uptick to a one-week high.
• Recession fears weigh on investors’ sentiment and act as a headwind for the pair.
• The emergence of some USD dip-buying further contributes to capping the upside.

The NZD/USD pair retreats a few pips from the weekly high touched earlier this Friday and is currently placed near the lower end of its daily trading range, just above the 0.5700 mark.

The prevalent risk-off environment - as depicted by a generally weaker tone around the equity markets - turns out to be a key factor acting as a headwind for the risk-sensitive kiwi. Apart from this, the emergence of some US dollar buying caps the NZD/USD pair's modest uptick to the mid-0.5700s.

The prospects for a more aggressive policy tightening by global central banks, along with the risk of a further escalation in the Russia-Ukraine conflict, have been fueling recession fears. Mixed business activity data from China adds to the concerns and tempers investors' appetite for riskier assets.

In fact, the official Chinese PMI released this Friday showed that the country’s manufacturing sector unexpectedly expanded in September. The private survey, however, revealed that the downfall in the manufacturing sector deepened during the reported month amid headwinds from COVID lockdowns.

Apart from the anti-risk flow, elevated US Treasury bond yields help revive the USD demand and further contribute to keeping a lid on the NZD/USD pair. The recent hawkish comments by several FOMC members reinforced expectations that the Fed will hike rates at a faster pace to curb inflation.

This, in turn, lifts the yields on the benchmark 10-year US government bond to inch closer to a 12-year high and favours the USD bulls. The fundamental backdrop warrants some caution before positioning for an extension of the NZD/USD pair's recovery move from its lowest level since March 2020.

Market participants now look to the US Personal Consumption Expenditures (PCE) - the Fed's preferred inflation gauge, due later during the early North American session. The US economic docket also features the release of the Chicago PMI and revised Michigan Consumer Sentiment Index.

This, along with speeches by influential FOMC members and the US bond yields, will drive the USD demand and provide some impetus to the NZD/USD pair. Traders will further take cues from the broader market risk sentiment to grab short-term opportunities on the last day of the week.

Technical levels to watch