NZD/USD hits one-week high around 0.6820, upside potential seems limited

• NZD/USD gained some positive traction for the third successive day on Thursday.
• Easing Omicron fears continued acting as a tailwind for the perceived riskier kiwi.
• A modest pickup in the USD demand should keep a lid on any meaningful upside.

The NZD/USD pair edged higher through the early European session and climbed to a one-week high, around the 0.6820 region in the last hour.

The pair prolonged this week's goodish bounce from the 0.6735 area, or the lowest level since November 2020 and gained traction for the third successive day on Thursday. Easing concerns about the economic fallout from the new Omicron variant of the coronavirus continued acting as a tailwind for the perceived riskier kiwi. In the latest development, Pfizer said that the third dose of their COVID-19 vaccine neutralized the Omicron variant in lab tests and further boosted investors' confidence.

That said, escalating geopolitical tensions kept a lid on the optimistic move in the financial markets. Relations between the US and Russia took a turn for the worse after US President Joe Biden threatened to impose strong economic and other measures on Russia if it invades Ukraine. This comes after the US recently announced that it will not send an official delegation to the 2022 Winter Olympics in Beijing to protest against China's alleged violations of human rights.

This, in turn, drove some haven flows towards the US dollar and might hold back bullish traders from placing aggressive bets around the NZD/USD pair. The greenback was further underpinned by the prospects for a faster policy tightening by the Fed and drew additional support from a further rise in the US Treasury bond yields. In fact, the markets have been pricing in the possibility for an eventual Fed liftoff in May 2022 amid worries about the persistent rise in inflationary pressures.

Hence, the market focus remains glued to Friday's release of the US CPI report. The data would influence the Fed's decision to taper its stimulus at a faster pace and set the stage for an interest rate hike, which, in turn, will drive the USD demand. This further warrants some caution before positioning for any further appreciating move for the NZD/USD pair amid absent relevant market moving economic releases from the US.

Technical levels to watch