NZD/USD trades with modest losses around 0.6330 area, downside seems cushioned

• NZD/USD pulls back from over a one-month high touched on Monday, though lacks follow-through.
• The overnight rise in the US bond yields underpins the USD and acts as a headwind for the major.
• The Fed’s less hawkish outlook could cap the USD and lend support to the pair ahead of the US CPI.

The NZD/USD pair edges lower on Tuesday and for now, seems to have snapped a five-day winning streak to over a one-month high touched the previous day. The pair remains on the defensive through the early European session and is currently placed around the 0.6335-0.6330 region, though any meaningful downfall still seems elusive.

The overnight sharp rally in the US Treasury bond yields continues to lend some support to the US Dollar (USD), which, in turn, is seen as a key factor acting as a headwind for the NZD/USD pair. The Federal Reserve's (Fed) quarterly Senior Loan Officer Opinion Survey (SLOOS) released on Monday showed that tightening credit conditions for US businesses and households was due to the aggressive rate hikes rather than severe banking sector stress. This, in turn, fueled hopes that the US banking sector is not headed for a wider crisis and pushed the US bond yields higher.

The upside for the USD, however, remains capped in the wake of a less hawkish stance adopted by the Fed. It is worth recalling that the US central bank last week outlined a more stringent, data-driven approach to raising rates further and opened the door for an imminent pause in its year-long rate-hiking cycle. Moreover, the markets have also started pricing in the possibility that the Fed will begin cutting rates in the second half of this year. This, along with expectations for further rate hikes by the Reserve Bank of New Zealand (RBNZ), should limit losses for the NZD/USD pair.

Traders might also refrain from placing aggressive bets and prefer to wait for the release of the latest US consumer inflation figures on Wednesday. The crucial US CPI report will influence market expectations about the Fed's next policy move, which, in turn, will play a key role in driving the near-term USD demand and help determine the next leg of a directional move for the NZD/USD pair. In the meantime, traders on Tuesday will take cues from a scheduled speech by New York Fed President John Williams in the absence of any relevant macroeconomic releases from the US.

Technical levels to watch