NZD/USD: Limited bullish potential below 0.6800 amid inflation, coronavirus fears

• NZD/USD struggles to keep the bounce off monthly horizontal support.
• Market sentiment dwindles amid inflation fears, virus woes.
• Powell’s prepared remarks for Testimony showed readiness to fight inflation.
• No major data at home but Fedspeak, inflation chatters and covid updates are the key for fresh impulse.

NZD/USD dribbles around 0.6750-60 during early Tuesday morning in Asia, following a negative start to the key week.

The kiwi pair struggles around short-term horizontal support, despite an absence of major data, as traders remain cautious ahead of Wednesday’s US inflation fears. Adding to the bearish bias for the quote are the coronavirus fears and geopolitical tussles among the leading global economies.

“Market chatter points the finger of blame for the rout on the usual suspects – inflation, tighter policy and COVID, and in that environment, given how much positivity is priced in locally, New Zealand seemingly does have more to lose than other countries,” said analysts at the Australia and New Zealand Banking Group (ANZ).

The fears of a faster rate hike by the US Federal Reserve (Fed) recently got support from prepared remarks of Fed Chair Jerome Powell, for Tuesday’s Testimony. The Fed Boss said, “Will stop higher inflation from getting entrenched.”

Earlier in the day, December NY Fed’s survey of consumer expectations remained unchanged for three-year and one-year basis at 4.0% and 6.0%. The figures are much higher than the Fed’s inflation forecasts and hence push the US central bank towards speedy rate lifts.

On the same line, recently steady US inflation expectations, as per 10-Year Breakeven Inflation Rate numbers from the Federal Reserve Bank of St. Louis (FRED), also hint at the tighter monetary policy by the Fed and reduction in the carry trade opportunities, which in turn weigh on the NZD/USD prices.

Elsewhere, worsening virus conditions in Auckland also challenges the Kiwi policymakers and challenges NZD/USD pair’s corrective rebound. Additionally, the US-China tussles continue, recently over trade and the human rights issues, and the Russia-Ukraine matter gains major attention ahead of this week’s Washington-Moscow meeting, weighing on the commodities and Antipodeans amid cautious mood.

Amid these plays, US 10-year Treasury yields crossed 1.80% before closing with 1.4 basis points (bps) of a downside to 1.75%. Further, Wall Street also dropped more in the initial hours ahead of the daily mixed close.

Moving on, Australia’s Retail Sales and Testimony by Fed Chair Powell will decorate today’s calendar and will be important for NZD/USD traders to watch. However, major attention will be given to inflation and covid chatters for clear direction.

Technical analysis

NZD/USD fails to keep the bounce off five-week-old horizontal support around 0.6740, suggesting further downside towards 2021 low near 0.6700 amid downbeat MACD and RSI line.

Meanwhile, a convergence of the 100 and 200 SMAs, as well as 23.6% Fibonacci retracement (Fibo.) level of mid-November to December downside, around 0.6790 acts as a wall of resistance for the Kiwi pair.