NZD/USD trades with modest gains amid weaker USD, lacks bullish conviction

• NZD/USD manages to hold above the 0.6300 mark amid a modest US Dollar weakness.
• The lack of hawkish signals from Fed’s Powell, sliding US bond yields weigh on the buck.
• A softer risk tone amid looming recession risks could cap gains for the risk-sensitive Kiwi.

The NZD/USD pair struggles to gain any meaningful traction on Wednesday and remains confined in a narrow range, above the 0.6300 mark through the early European session.

A generally softer tone around the equity markets is seen as a key factor acting as a headwind for the risk-sensitive Kiwi, though a modest US Dollar weakness lends support to the NZD/USD pair. The market sentiment remains fragile amid concerns about economic headwinds stemming from rising borrowing costs, the COVID-19 outbreak in China and the protracted Russia-Ukraine war. Apart from this, fears about the worsening US-China relations temper investors' appetite for riskier assets.

The USD, on the other hand, is undermined by speculations for an imminent pause in the Fed's policy-tightening cycle later this year. In fact, Fed Chair Jerome Powell failed to offer hawkish signals on Tuesday and reiterated that the process of disinflation was already underway. This, in turn, fuels speculations that interest rates may not rise much further, which is evident from a fresh leg down in the US Treasury bond yields and exerts some downward pressure on the greenback.

The lack of any strong buying interest, however, warrants some caution for bullish traders and before confirming that the recent pullback from the highest level since June 2022 has run its course. The post-NFP breakdown below the 0.6400 mark, meanwhile, suggests the path of least resistance for the NZD/USD pair. Hence, a subsequent move up could be seen as a selling opportunity and is more likely to remain limited in the absence of any relevant market-moving data from the US.

Technical levels to watch