NZD/USD slides to mid-0.5900s, back closer to over two-year low set on Friday

• NZD/USD attracts fresh sellers on Monday and drifts back closer to its lowest level since May 2020.
• Aggressive Fed rate hike bets, the risk-off mood continues to underpin the USD and exert pressure.
• Trades, however, might refrain from placing aggressive bets ahead of the FOMC policy meeting.

The NZD/USD pair struggles to capitalize on its modest uptick and meets with a fresh supply near the 0.6000 psychological mark on Monday. The intraday downfall drags spot prices to mid-0.5900s during the early European session, back closer to the lowest level since May 2020 touched on Friday.

A combination of factors assists the US dollar to regain positive traction on the first day of a new week, which, in turn, is seen exerting pressure on the NZD/USD pair. Growing acceptance that the Fed will hike interest rates at a faster pace to tame inflation continues to act as a tailwind for the greenback. Apart from this, the prevalent risk-off environment offers additional support to the safe-haven buck and contributes to driving flows away from the risk-sensitive kiwi.

The market sentiment remains fragile amid worries that the rapid rise in borrowing costs will lead to a deeper global economic downturn. This, along with the economic headwinds stemming from fresh COVID-19 lockdowns in China and the protracted Russia-Ukraine war, has been fueling recession fears. This, in turn, tempers investors' appetite for riskier assets, which is evident from a generally weaker tone around the equity markets and benefitting traditional safe-haven assets.

The fundamental backdrop seems tilted firmly in favour of bearish traders and suggests that the path of least resistance for the NZD/USD pair is to the downside. Investors, however, might refrain from placing aggressive bets and prefer to move to the sidelines ahead of the two-day FOMC policy meeting, starting on Tuesday. The US central bank is scheduled to announce its decision on Wednesday and is universally expected to deliver at least a 75 bps interest rate increase.

The markets have also been pricing in a small chance of full 100 bps lift-off. Hence, the focus will be on the updated economic projections, the so-called dot plot and Fed Chair Jerome Powell's remarks at the post-meeting press conference. Investors will look closely look for fresh clues about a more aggressive policy tightening by the US central bank. This will play a key role in influencing the USD price dynamics and provide a fresh directional impetus to the NZD/USD pair.

Technical levels to watch