NZD/USD clings to modest gains around 0.6765-70 area, upside seems limited

• NZD/USD gained some positive traction on Tuesday amid modest USD weakness.
• Retreating US bond yields turned out to be a key factor that undermined the USD.
• Fed rate hike bets should limit any deeper USD losses and cap gains for the major.

The NZD/USD pair traded with a mild positive bias and held steady above mid-0.6700s through the early European session, albeit lacked any follow-through buying.

The US dollar struggled to capitalize on the previous day's modest gains and edged lower during the early part of the trading on Tuesday amid a further pullback in the US Treasury bond yields. This, in turn, was seen as a key factor that assisted the NZD/USD pair to regain positive traction. That said, a combination of factors kept a lid on any meaningful upside, at least for the time being.

The prospects for a faster policy tightening by the Fed held back traders from placing aggressive bearish bets around the USD. In fact, the money markets have fully priced in the possibility of an eventual Fed lift-off in March and are anticipating four interest rate hikes by the end of 2022. This, along with the cautious market mood, could further benefit the greenback's safe-haven status.

The recent strong rally in the US Treasury bond yields continued weighing on investors' sentiment. This was evident from a softer tone around the equity markets, which, in turn, acted as a headwind for perceived riskier currencies, including the kiwi. Trades also seemed reluctant and preferred to wait on the sidelines ahead of Fed Chair Jerome Powell's nomination hearing later this Tuesday.

Powell's comments would be closely scrutinized for fresh clues about the timing and pace of monetary policy normalisation by the Fed. Apart from this, investors will take cues from the release of the latest US consumer inflation figures on Wednesday. This, in turn, will play a key role in influencing the USD price dynamics and provide a fresh directional impetus to the NZD/USD pair.

Even from a technical perspective, the NZD/USD pair has been oscillating in a narrow trading band over the past one week or so. This further makes it prudent to wait for a strong follow-through buying before positioning for any further near-term appreciating move.

Technical levels to watch