NZD/USD sticks to gains near daily high, upside potential seems limited

• NZD/USD attracted some dip-buying on Monday amid subdued USD price action.
• The Ukraine crisis, hawkish Fed expectations should help limit losses for the buck.
• The fundamental backdrop warrants some caution for aggressive bullish traders.

The NZD/USD pair held on to its modest intraday gains through the first half of the European session and was last seen trading near the daily high, around the 0.6935-0.6940 region.

Having defended the very important 200-day SMA, the NZD/USD pair attracted fresh buying on Monday and stalled its recent pullback from the 0.7000 psychological mark, or the YTD high touched last week. Stable performance in the equity markets undermined the safe-haven US dollar and turned out to be a key factor that benefitted the perceived riskier kiwi. The uncertainty over Ukraine, along with hawkish Fed expectations, helped limit losses for the USD and should cap any meaningful upside for the major, at least for now.

In the latest geopolitical developments, Ukraine accused Russian forces of carrying out a massacre in the town of Bucha. Adding to this, British Prime Minister Boris Johnson said that his government would step up sanctions, as well as military and humanitarian support for Ukraine. Moreover, German defence minister Christine Lambrecht said on Sunday that the European Union must discuss banning imports of Russian gas. This, in turn, should keep a lid on any optimistic move in the markets and lend support to the safe-haven buck.

Apart from this, growing acceptance that the Fed would adopt a more aggressive policy stance to combat stubbornly high inflation should act as a tailwind for the greenback. In fact, the markets have been pricing in a 100 bps Fed rate hike move over the past two policy meetings, which was reinforced by Friday's US monthly jobs report. This, in turn, remained supportive of elevated US Treasury bond yields, which supports prospects for the emergence of some USD dip-buying and warrants caution before placing bullish bets around the NZD/USD pair.

Technical levels to watch