NZD/USD recovers few pips from its lowest level since March 2020, lacks follow-through

• NZD/USD recovers early lost ground to over two-year low amid modest USD pullback.
• Aggressive Fed rate hike bets, surging US bond yields limit the downside for the buck.
• The prevalent risk-off mood also contributes to capping gains for the risk-sensitive kiwi.

The NZD/USD pair stages a modest recovery from its lowest level since March 2020 and climbs to the top end of its daily range, around the 0.5575 region during the first half of the European session.

The US dollar surrenders its intraday gains to a one-and-half-week high and turns out to be a key factor offering some support to the NZD/USD pair. In the absence of a fresh fundamental catalyst, the USD pullback could be solely attributed to some profit-taking and is likely to remain limited amid hawkish Fed expectations.

Market participants seem convinced that the US central bank will stick to its aggressive rate hiking path to tame inflation and have been pricing in another supersized 75 bps increase in November. The bets were reaffirmed by the robust US jobs data on Friday and the overnight hawkish comments by Fed Vice Chair Lael Brainard.

Brainard reiterated the Fed’s commitment to bring inflation down and said that the central bank will keep raising rates in the near term. This, in turn, triggers a fresh leg up in the US Treasury bond yields and lifts the benchmark 10-year US government bond back closer to the 4.0% threshold, which should act as a tailwind for the buck.

Apart from this, the prevalent risk-off environment could limit the downside for the safe-haven buck and keep a lid on any attempted recovery for the risk-sensitive kiwi. This, in turn, suggests that the path of least resistance for the NZD/USD pair is to the downside and any subsequent move up might still be seen as a selling opportunity.

In the absence of any relevant market-moving economic releases from the US, traders on Tuesday will take cues from speeches by influential FOMC members. This, along with the US bond yields and the broader market risk sentiment, might drive the USD demand and provide some impetus to the NZD/USD pair ahead of the FOMC minutes on Wednesday.

Technical levels to watch