NZD/USD trades with modest gains just below 0.6800 mark, lacks bullish conviction

• NZD/USD gained some positive traction on Tuesday and recovered a part of the overnight losses.
• The prevalent risk-on mood was seen as a key factor that benefitted the perceived riskier kiwi.
• Elevated US bond yields acted as a tailwind for the USD and kept a lid on any meaningful upside.

The NZD/USD pair traded with a mild positive bias through the early European session and was last seen hovering just a few pips below the 0.6800 round-figure mark.

The pair attracted some buying during the first half of the trading on Tuesday and recovered a part of the previous day's retracement slide from the 0.6855 region, or a one-month high. The prevalent risk-on mood was seen as a key factor that extended some support to the perceived riskier kiwi. Despite the continuous rise in COVID-19 cases globally, 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 the recent strong runup in the equity markets to record highs.

The uptick, however, lacked bullish conviction and so far, has struggled to find acceptance above the 0.6800 mark amid a modest US dollar strength. Expectations for a faster policy tightening by the Fed triggered a massive rally in the US Treasury bond yields on Monday, which, in turn, continued acting as a tailwind for the greenback. In fact, the money markets have fully priced in the first-rate hike by May and two more by the end of 2022. This, in turn, pushed the yield on the benchmark 10-year US government bond to 1.6420%, or the highest level since November 24.

Moreover, investors also seemed reluctant to place aggressive bets, rather might prefer to wait on the sidelines ahead of this week's key event/data risk. A rather busy week in terms of important US macro data kicks off with the release of ISM Manufacturing PMI and JOLTS Job Openings data later during the early North American session. The Fed is also scheduled to release the minutes of its December meeting on Wednesday, which will be followed by the ADP report and the ISM Services PMI on Thursday. The key focus, however, will remain on the closely watched US monthly jobs report (NFP) on Friday.

The mixed fundamental backdrop warrants some caution for bullish traders and makes it prudent to wait for a sustained strength above the 0.6855 resistance zone before positioning for any further gains. This would reaffirm that the NZD/USD pair has formed a near-term bottom near the 0.6700 round-figure mark, or the 2021 low touched on December 15 and set the stage for some meaningful appreciating move.

Technical levels to watch