NZD/USD looks weaker below 0.6800 mark amid risk-off, focus remains on US CPI

• A combination of factors failed to assist NZD/USD to capitalize on its early modest uptick.
• The cautious market mood capped the perceived riskier kiwi amid a subdued USD demand.
• Hawkish Fed expectations acted as a tailwind for the USD ahead of the key US CPI report.

The NZD/USD pair surrendered its modest intraday gains and dropped to a fresh daily low, around the 0.6785 region in the last hour.

The pair gained some positive traction during the Asian session on Friday, albeit struggled to capitalize on the move and drifted into the negative territory for the second successive day. A softer risk tone – as depicted by a negative mood in the equity markets – acted as a headwind for the perceived riskier kiwi.

Apart from this, a modest uptick in the US Treasury bond yields underpinned the safe-haven US dollar against the backdrop of hawkish Fed expectations. This was seen as another factor that prompted some intraday selling around the NZD/USD pair, though the downside is likely to remain cushioned ahead of the US consumer inflation.

The markets seem convinced that the Fed would adopt a more aggressive policy response to contain stubbornly high inflation. In fact, the money markets indicate the possibility of liftoff in May 2022. Hence, the US CPI report would influence the Fed's decision to taper its stimulus at a faster pace and set the stage for a rate hike.

Heading into the key data risk, investors might prefer to wait on the sidelines and refrain from placing aggressive directional bets. This, in turn, should help limit any deeper losses for the NZD/USD pair, at least for the time being, and warrants some caution before positioning for any further depreciating move.

Technical levels to watch