NZD/USD hangs near one-week low, just below 0.6800 mark amid softer risk tone

• NZD/USD struggled to capitalize on the attempted recovery from a one-week low.
• A softer risk tone was seen as a key factor that weighed on the perceived riskier kiwi.
• Retreating US bond yields kept the USD bulls on the defensive and helped limit losses.

The NZD/USD pair seesawed between tepid gains/minor losses through the early European session and was last seen trading in the neutral territory, just below the 0.6800 mark.

The pair reversed an early dip to a one-week low, around the 0.6775 region, albeit struggled to capitalize on the attempted recovery amid a softer risk tone. The recent optimism over reports that the Omicron variant might be less severe than previously feared was overshadowed by uncertainty over the economic impact of the continuous surge in new COVID-19 cases. This, in turn, weighed on investors' sentiment, which was evident from a weaker trading sentiment around the equity markets and drove flows away from the perceived riskier kiwi.

The downside, however, remained cushioned, at least for the time being, amid subdued US dollar price action. The flight to safety led to a modest decline in the US Treasury bond yields, which, in turn, was seen as a key factor that kept the USD bulls on the defensive. That said, the Fed's hawkish outlook, indicating at least three rate hikes next year, acted as a tailwind for the greenback and kept a lid on any meaningful gains for the NZD/USD pair.

Moreover, investors also seemed reluctant to place aggressive directional bets amid thin year-end trading conditions. Market participants now look forward to the US economic docket, featuring the second-tier releases of the November Goods Trade Balance, Wholesale Inventories and Pending Home Sales data. This, along with the US bond yields and the broader market risk sentiment, will influence the USD and provide some impetus to the NZD/USD pair.

Technical levels to watch