NZD/USD corrects from multi-month top, downside seems cushioned amid positive risk tone

• NZD/USD witnessed modest pullback from the four-month high touched earlier this Wednesday.
• Elevated US bond yields acted as a tailwind for the USD and prompted some intraday profit-taking.
• The risk-on mood, rising commodity prices should help limit losses for the resources-linked kiwi.

The NZD/USD pair edged lower through the early European session and dropped to a fresh daily low, around mid-0.6900s in the last hour.

The pair witnessed modest retracement slide from the four-month high, around the 0.6975 region touched earlier this Wednesday and eroded a part of the previous day's strong gains. The recent runaway rally in the US Treasury bond yields acted as a tailwind for the US dollar, which, in turn, prompted trades to take some profits off their bullish positions around the NZD/USD pair.

The sell-off in the US bond market picked up pace after Fed Chair Jerome Powell suggested that the US central bank could adopt a more aggressive stance to combat inflation. Moreover, San Francisco Fed President Mary Daly noted that it was time to remove policy accommodation, while St. Louis Fed President James Bullard and Cleveland’s Loretta Mester called for faster hikes.

Investors were quick to price in a 50 bps rate hike at the next FOMC meeting and pushed the yield on the 10-year US bond to the highest level since 2019, which helped limit the USD losses. That said, the prevalent risk-on mood, along with rising commodity prices, should lend support to the perceived riskier kiwi and warrants caution before confirming that the NZD/USD pair has topped out.

Even from a technical perspective, the overnight move beyond the 200-day SMA for the first time since November 2021 supports prospects for the emergence of some dip-buying around the NZD/USD pair. Market participants now look forward to Fed Chair Jerome Powell's remarks at the BIS innovation summit. Apart from this, the US bond yields might influence the USD price dynamics.

Traders will further take cues from fresh developments surrounding the Russia-Ukraine saga, which will drive the broader market risk sentiment and commodity prices. The combination of factors should provide some impetus to the NZD/USD pair and allow traders to grab some short-term opportunities.

Technical levels to watch