NZD/USD plummets to two-year low, seems vulnerable below 0.6200 amid stronger USD/risk-off

• NZD/USD witnessed heavy selling on Friday and dived to its lowest level since May 2020.
• Aggressive Fed rate hike bets revived the USD demand and exerted downward pressure.
• Recession fears, the risk-off mood further drove flows away from the risk-sensitive kiwi.

The NZD/USD pair struggled to capitalize on the overnight modest recovery move and came under intense selling pressure on Friday. The intraday bearish trend extended through the early European session and dragged spot prices to the lowest level since May 2020, around the 0.6165 region in the last hour.

Speaking at the ECB's annual forum in Sintra on Wednesday, Fed Chair Jerome Powell lifted bets for more aggressive rate hikes and said that the US economy is well-positioned to handle tighter policy. Powell further added that the Fed remains focused on getting inflation under control and that the market pricing is pretty close to the dot plot. Adding to this, the prevalent risk-off environment boosted demand for the safe-haven US dollar and weighed on the risk-sensitive kiwi.

The prospects for a faster policy tightening by major central banks to curb soaring inflation, along with the ongoing Russia-Ukraine war, have been fueling fears about a possible recession. This, in turn, tempered investors' appetite for perceived riskier assets, which was evident from an extended sell-off in the equity markets. The combination of supporting factors assisted the USD to inch back closer to a 20-year high touched in June and exerted heavy downward pressure on the NZD/USD pair.

With the latest leg down, spot prices confirmed a fresh bearish breakdown below the 0.6200 round-figure mark. This was seen as another factor that aggravated the bearish pressure surrounding the NZD/USD pair and might have already set the stage for further losses. Furthermore, bearish technical indicators are still away from flashing oversold conditions and add credence to the negative outlook. Hence, some follow-through weakness, towards the next relevant support near the 0.6100 mark, remains a distinct possibility. Traders now look forward to the US ISM Manufacturing PMI for a fresh impetus.

Technical levels to watch