NZD/USD sticks to intraday gains around 0.6835-40, upside seems capped amid stronger USD

• NZD/USD gained some positive traction during the early part of the trading on Monday.
• Resurgent USD demand acted as a headwind and capped any further gains for the pair.
• The risk-on environment might continue to lend support to the perceived riskier kiwi.

The NZD/USD pair trimmed a part of its intraday gains and was last seen trading just a few pips above the daily low, around the 0.6835-40 region during the early European session.

The pair kicked off the new year on a positive note and climbed back closer to a near one-month high touched last week, though struggled to capitalize on the move beyond mid-0.6800s. A strong pickup in the US dollar demand was seen as a key factor that acted as a headwind for the NZD/USD pair and capped the upside.

The USD made a solid comeback in quiet holiday trading on Monday and reversed a major part of the previous session's decline to the lowest level since November 30. The Fed's hawkish outlook, indicating at least three rate hikes in 2022, along with elevated US Treasury bond yields acted as a tailwind for the buck.

It is worth recalling that the yield on the benchmark 10-year US government bond recorded the largest yearly increase since 2013 and ended 2021 above the 1.50% threshold. That said, the underlying bullish sentiment in the markets might cap the upside for the safe-haven USD and help limit the downside for the NZD/USD pair.

Despite the continuous surge in new COVID-19 cases, investors remain optimistic over signs that the Omicron variant might be less severe than feared and is unlikely to derail the economic recovery. This was evident from a generally positive tone around the equity markets, which could lend some support to the perceived riskier kiwi.

Investors might also refrain from placing aggressive directional bets and prefer to wait for important US macro data scheduled at the beginning of a new month. This week's US economic docket highlights the release of ISM PMIs and the ADP report on private-sector employment ahead of the closely-watched US monthly jobs report (NFP) on Friday.

Technical levels to watch