NZD/USD clings to gains near daily highs, around 0.7015-20 region

• NZD/USD recovered around 35-40 pips from five-week lows touched earlier this Wednesday.
• The USD witnessed some profit-taking from a 16-month peak and prompted short-covering.
• Hawkish Fed expectations to limit the USD losses and cap any meaningful upside for the pair.

The NZD/USD pair maintained its bid tone through the first part of the European session and was last seen hovering near the top end of its daily trading range, around the 0.7015-20 region.

The pair staged a goodish rebound from the 0.6980 region, or a five-week low touched earlier this Wednesday and recovered a part of the previous day's heavy losses. The US dollar struggled to preserve its intraday gains to the highest level since July 2020, instead witnessed some profit-taking and assisted the NZD/USD pair to regain positive traction.

Apart from this, rising bets for yet another rate hike by the Reserve Bank of New Zealand (RBNZ) later this month further acted as a tailwind for the kiwi. That said, the prospects for an early policy tightening by the Fed should help limit any meaningful USD losses. This, in turn, might cap the upside for the NZD/USD pair and warrants some caution for bulls.

Investors now seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflationary pressures. In fact, the markets have been pricing in the possibility for an eventual Fed rate hike move by July 2022. Adding to this, the Fed fund futures indicate a high likelihood of another raise by November.

Even from a technical perspective, the overnight sustained break and close below the 100-day SMA supports prospects for an extension of the recent downward trajectory witnessed over the past three weeks or so. Hence, the intraday positive move might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly.

Market participants now look forward to the US housing market data – Building Permits and Housing Starts – scheduled for release later during the early North American session. This, along with speeches by influential FOMC members and the US bond yields, will drive the USD demand and produce some trading opportunities around the NZD/USD pair.

Technical levels to watch