NZD/USD clings to recovery gains near mid-0.6800s, lacks follow-through

• NZD/USD gained some positive traction on Wednesday and moved away from a YTD low.
• A modest recovery in the equity markets extended support to the perceived riskier kiwi.
• Rising Fed rate hike bets could revive the USD demand and cap the upside for the major.

The NZD/USD pair held on to its intraday recovery gains through the early European session and was last seen trading around mid-0.6800s, up nearly 0.50% for the day.

The pair build on the previous day's bounce from the 0.6775-70 area, or the lowest level since November 2020 and gained some positive traction during the early part of the trading action on Wednesday. The global risk sentiment stabilized a bit as investors preferred to wait and see if the new Omicron coronavirus variant would eventually derail the economic recovery. This was evident from a goodish recovery in the equity markets, which, in turn, benefitted the perceived riskier kiwi.

On the other hand, the US dollar, so far, has struggled to attract any buyers despite rising bets for a more aggressive policy tightening by the Fed. Testifying before the Senate Banking Committee, Fed Chair Jerome Powell said that it is appropriate to consider wrapping up the tapering of asset purchases, perhaps a few months sooner. Powell added that it's time to retire the word transitory as the risk of persistently higher inflationary pressures has increased.

Reacting to Powell's remarks, the money markets started pricing in the possibility of at least a 50 bps rate hike by the end of 2022. This was reinforced by the ongoing recovery in the US Treasury bond yields, though did little to impress the USD bulls. Nevertheless, the fundamental backdrop supports prospects for the emergence of some dip-buying around the greenback, warranting some caution before confirming that the NZD/USD pair has formed a near-term bottom.

Market participants now look forward to the US economic docket, featuring the ADP report on private-sector employment and ISM Manufacturing PMI later during the early North American session. Apart from this, Fed Chair Jerome Powell and US Treasury Secretary Janet Yellen's joint testimony before the House Financial Services Committee will influence the greenback. Traders will further take cues from the broader market risk sentiment for some short-term opportunities around the NZD/USD pair.

Technical levels to watch