NZD/USD holds steady above 0.6800, upside potential seems limited

• A generally positive tone around the equity market assisted NZD/USD to gain traction on Thursday.
• Rising Fed rate hike bets acted as a tailwind for the USD and capped any further upside for the pair.
• Omicron fears could keep a lid on any optimistic move and undermine the perceived riskier kiwi.

The NZD/USD pair surrendered its modest intraday gains and has now drifted back closer to the 0.6800 mark heading into the European session.

Following the previous day's turnaround from the weekly high, the NZD/USD pair managed to attract some buying during the early part of the trading action on Thursday, albeit lacked any follow-through. A generally positive tone around the Asian equity markets acted as a headwind for the safe-haven US dollar and benefitted the perceived riskier kiwi. That said, hawkish Fed expectations helped limit any deeper USD pullback and kept a lid on any meaningful gains for the major.

The money markets started pricing in the possibility of at least a 50 bps rate hike by the end of 2022 after Fed Chair Jerome Powell signalled to speed up the tapering of asset purchases. Apart from this, concerns about the economic fallout from a possibly vaccine-resistant coronavirus variant should keep a lid on any optimistic move in the markets. The market worries exacerbated further after US officials said that the new more transmissible Omicron variant had been found in the country.

The fundamental backdrop favours the USD bulls and supports prospects for an extension of the NZD/USD pair's recent downward trajectory witnessed since late October. That said, repeated failures to find acceptance below the 0.6800 mark warrants some caution for aggressive bearish traders. This makes it prudent to wait for some follow-through selling below the mentioned handle before confirming that negative outlook and positioning for a further near-term depreciating move.

Market participants now look forward to the US economic docket, featuring the release of Challenger Job Cuts and the usual Weekly Initial Jobless Claims data. This, along with speeches by a slew of influential FOMC members, will influence the USD price dynamics and provide some impetus to the NZD/USD pair. Traders will further take cues from developments surrounding the coronavirus saga and the broader market risk setiment to grab some short-term opportunities.

Technical levels to watch