NZD/USD retreats further from one-month tops, slides to mid-0.7000s

• NZD/USD witnessed an intraday pullback from one-month tops touched earlier this Monday.
• Hawkish Fed expectations, rallying US bond yields helped revive demand for the greenback.
• A softer risk tone further benefitted the USD’s safe-haven status and exerted some pressure.

The NZD/USD pair extended its corrective pullback from one-month tops and dropped to fresh daily lows, around mid-0.7000s during the early part of the European session.

The pair gained some positive traction on the first day of a new trading week and shot to the highest level since September 16 in reaction to a hotter-than-expected New Zealand CPI report. Bulls, however, struggled to capitalize on the move, or find acceptance above the 0.7100 mark amid a strong pickup in the US dollar demand.

The prospects for an early policy tightening by the Fed pushed the yield on the benchmark 10-year US government bond back above the 1.60% threshold on Monday. This, along with a generally softer risk tone, benefitted the greenback's relative safe-haven status and acted as a headwind for the perceived riskier kiwi.

The FOMC meeting minutes released last Wednesday reaffirmed that the Fed remains on track to begin rolling back its massive pandemic-era stimulus as soon as November. The markets have also started pricing in the possibility of a rate hike in 2022 amid worries that the recent rally in commodity prices will stoke inflation.

Meanwhile, fears about a faster than expected rise in inflation and a sharp deceleration in the Chinese economic growth fueled concerns about the return of stagflation. In fact, the world's second-largest economy recorded a modest 0.2% growth during the third quarter and the yearly rate fell to 4.9% from 7.9% previous.

From a technical perspective, the early uptick faltered near a confluence resistance comprising of the very important 200-day SMA and a downward sloping trend-line extending from YTD tops. With the latest leg down, the NZD/USD pair has now snapped three consecutive days of the winning streak, though the pullback lacked bearish conviction.

Hence, it will be prudent to wait for a strong follow-through selling before confirming that the NZD/USD pair has topped out in the near term and placing aggressive bearish bets. Market participants now look forward to the release of US Industrial Production data for some impetus later during the early North American session.

Technical levels to watch