NZD/USD dives to 0.5900 mark, lowest since April 2020 amid broad-based USD strength

• NZD/USD drops to its lowest level since April 2020 and is pressured by a combination of factors.
• Bets for more aggressive Fed rate hikes assist the USD to rebound swiftly from a one-week low.
• Recession fears further benefit the safe-haven greenback and weigh on the risk-sensitive kiwi.

The NZD/USD pair adds to the previous day's modest losses and remains under heavy selling pressure for the second successive day on Tuesday. The downward trajectory drags spot prices to the lowest level since April 2020 during the first half of the European session, with bears now awaiting a sustained break below the 0.5900 mark.

The US dollar stages a solid rebound from a one-week low touched earlier this Tuesday, which turns out to be a key factor exerting downward pressure on the NZD/USD pair. The stronger US CPI report released last week all but cemented expectations that the Fed will stick to its aggressive policy tightening path. This remains supportive of elevated US Treasury bond yields and continues to act as a tailwind for the greenback.

Apart from this, a fresh wave of a risk-aversion trade further benefits the safe-haven buck and contributes to driving flows away from the risk-sensitive kiwi. The market sentiment remains fragile amid concerns that rapidly rising interest rates will lead to a deeper global economic downturn. Furthermore, headwinds stemming from China's zero-covid policy and the protracted war in Ukraine have been fueling recession fears.

From a technical perspective the pair has reached a major multi-month trend line at 0.5900 drawn by joining the May and July 2022 lows. This warrants some caution on the part of bears as such key support may provide a rallying point for bulls. A clear and decisive break below the trend line, confirmed by a daily close or open below, would cement the bearish trend and signal a steeper acceleration to the downside. That said, caution is warranted ahead of central bank risk this week. The Fed is scheduled to announce its policy decision at the end of a two-day meeting on Wednesday and this is likely to be a game-changer for the dollar and the pair.

The US central bank is widely expected to deliver another 75 bps rate increase. Hence, the focus will be on updated economic projections, the so-called dot plot and Fed Chair Jerome Powell's speech at the post-meeting press conference. Market participants will look for clues about the Fed's policy outlook, which will play a key role in influencing the USD price dynamics and help determine the near-term trajectory for the NZD/USD pair.

Technical levels to watch