NZD/USD slides back closer to 0.6800 amid softer risk tone, stronger USD

• A combination of factors prompted some intraday selling around NZD/USD on Monday.
• The cautious market mood weighed on the perceived riskier kiwi amid a stronger USD.
• The year-end thin liquidity could hold traders from placing aggressive directional bets.

The NZD/USD pair surrendered its modest intraday gains and was last seen hovering near the daily low, just above the 0.6800 mark during the early European session.

The pair struggled to capitalize on its early uptick, instead met with some supply near the 0.6825 region and was weighed down by a combination of factors. Uncertainty over the economic impact of the continuous rise in new COVID-19 cases overshadowed the recent optimism led by reports that the Omicron variant might be less severe than previously feared. This, in turn, tempered investors' risk appetite and acted as a headwind for the perceived riskier kiwi.

Meanwhile, the cautious market – as depicted by a softer tone around the equity markets – drove some haven flows towards the US dollar, which was further underpinned by the Fed's hawkish outlook. It is worth recalling that the so-called dot plot indicated that the Fed officials expect to raise the fed funds rate at least three times next year. A stronger USD was seen as another factor that kept a lid on any meaningful upside for the NZD/USD pair.

The downside, however, remained cushioned, at least for the time being, as investors seemed reluctant amid the year-end thin liquidity conditions. Moreover, absent relevant market-moving economic releases warrant some caution before placing aggressive directional bets. Nevertheless, the fundamental backdrop seems tilted in favour of bearish traders. Hence, any attempted positive move might continue to confront stiff resistance ahead of mid-0.6800s.

Technical levels to watch