NZD/USD flirts with daily high near 0.6630 area, upside potential seems limited

• NZD/USD caught fresh bids on Tuesday and snapped three successive days of the losing streak.
• Modest USD weakness extended some support to the major, though the upside seems limited.
• Hawkish Fed expectations, geopolitical tensions to act as a tailwind for the buck and cap gains.

The NZD/USD pair maintained its bid tone through the early European session and was last seen trading near the daily high, around the 0.6625-0.6630 area.

The pair gained some positive traction on Tuesday and recovered a part of the previous day's slide to sub-0.6600 levels, or over a one-week low. The uptick assisted the NZD/USD pair to snap three consecutive days of the losing streak and was sponsored by modest US dollar weakness. That said, any meaningful upside still seems elusive amid the prospects for a faster policy tightening by the Fed and geopolitical tensions.

The markets seem convinced that the Fed would adopt a more aggressive policy response to combat high inflation and have been pricing in a 50 bps rate hike in March. The bets were reinforced by the red-hot US CPI released last week and comments from St. Louis Fed President James Bullard, who reiterated calls for a faster pace of interest rate hikes. This, along with a softer risk tone, should act as a tailwind for the greenback.

The mobilising of Russian troops to forward locations on the Ukraine border fueled worries about a significant military action/confrontation. This, in turn, continued weighing on investors' sentiment, which was evident from the cautious mood around the equity markets. Hence, it will be prudent to wait for strong follow-through buying before confirming that NZD/USD pair's recent pullback from the monthly high has run its course.

Market participants now look forward to the release of the US Producer Price Index (PPI) for January, due later during the North American session. Apart from this, the market focus will be on fresh geopolitical developments, which will play a key role in influencing the broader market risk sentiment. This would drive the USD demand and produce some meaningful trading opportunities around the NZD/USD pair.

Technical levels to watch