NZD/USD bounces off YTD low, upside potential seems limited ahead of FOMC on Wednesday

• NZD/USD attracted some buying near 0.6735, or a fresh YTD low touched earlier this Tuesday.
• A positive tone around the equity markets extended some support to the perceived riskier kiwi.
• COVID-19 woes, hawkish Fed expectations acted as a tailwind for the USD and capped the upside.

The NZD/USD pair moved back above mid-0.6700s during the early European session, albeit struggled to capitalize on the intraday recovery from a fresh YTD low.

The pair edged lower during the early part of the trading on Tuesday and dropped to the lowest level since November 2020, though a combination of supporting factors helped limit further losses. A slight improvement in the global risk sentiment – as depicted by a generally positive tone around the equity markets – extended some support to the perceived riskier kiwi.

On the other hand, the US dollar struggled to preserve its modest intraday gains to a one-week high and was seen consolidating near a one-week high. This was seen as another factor that assisted the NZD/USD pair to attract some buying near the 0.6735 region. That said, any meaningful recovery still seems elusive amid fresh COVID-19 jitters and hawkish Fed expectations.

The economic risks emerging from the spread of the Omicron variant and the imposition of fresh restrictions in Europe and Asia should keep a lid on any optimistic move in the markets. Moreover, the prospects for an early policy tightening by the Fed should act as a tailwind for the greenback and hold back traders from placing bullish bets around the NZD/USD pair.

Investors might also prefer to wait on the sidelines and look for a fresh catalyst from the outcome of a two-day FOMC monetary policy meeting, scheduled to be announced on Wednesday. This further makes it prudent to wait for a strong follow-through buying before confirming that the NZD/USD pair has bottomed out in the near term and positioning for any meaningful upside.

Heading into the key central bank event risk, trades on Tuesday might take cues from the release of the US Producer Price Index (PPI) later during the early North American session. Apart from this, developments surrounding the coronavirus saga and the broader market risk sentiment will also be looked upon for some short-term opportunities around the NZD/USD pair.

Technical levels to watch