NZD/USD clings to recovery gains around 0.6580 region, lacks follow-through

• NZD/USD gained some positive traction on Monday and snapped seven days of the losing streak.
• The USD witnessed profit-taking from a 19-month high and extended some support to the major.
• The Fed’s hawkish stance, cautious market mood should help limit USD losses and cap the pair.

The NZD/USD pair maintained its bid tone through the first half of the European session and was last seen trading near the daily high, around the 0.6580 region.

The pair witnessed some short-covering bounce on the first day of a new week amid oversold conditions on the daily chart and snapped seven consecutive days of the losing streak. The uptick allowed the NZD/USD pair to reversed Friday's losses to the lowest level since September 2020 and was sponsored by modest US dollar weakness.

The USD pullback lacked any obvious fundamental catalyst and could be attributed to some profit-taking following the post-FOMC bullish run to a 19-month high. That said, the prospects for a faster policy tightening by the Fed should act as a tailwind for the greenback and keep a lid on any meaningful recovery for the NZD/USD pair.

In fact, the markets have fully priced in an eventual Fed liftoff in March and expect five quarter-point rate hikes by the end of 2022. This was reinforced by elevated US Treasury bond yields, which support prospects for the emergence of some USD dip-buying and warrant caution before placing bullish bets around the NZD/USD pair.

Apart from this, an intraday turnaround in the US equity futures should further lend some support to the safe-haven greenback and cap the perceived riskier kiwi. This, in turn, makes it prudent to wait for a strong follow-through buying in order to confirm that NZD/USD pair has bottomed out and positioned for any further gains.

Market participants now look forward to the US economic docket, highlighting the release of the Chicago PMI. This, along with the US bond yields, will influence the USD price dynamics. Apart from this, traders will take cues from the broader market risk sentiment to grab some short-term opportunities around the NZD/USD pair.

Technical levels to watch