NZD/USD declines to over three-week low, around mid-0.6800s amid modest USD strength

• NZD/USD witnessed selling for the third straight day and retreated further from the YTD high.
• The Fed’s hawkish outlook, elevated US bond yields underpinned the USD and exerted pressure.
• A positive risk tone might cap the safe-haven USD and limit losses for the perceived riskier kiwi.

The NZD/USD pair continued losing ground through the mid-European session and dropped to over a three-week low, around mid-0.6800s in the last hour.

The pair prolonged this week's sharp retracement slide from the 0.7035 region, or the highest level since November 2021 and witnessed some follow-through selling for the third successive day on Friday. The downward trajectory was exclusively sponsored by the blowout US dollar rally, bolstered by the Fed's hawkish outlook.

In fact, the March 15-16 FOMC minutes released on Wednesday showed that policymakers were prepared to hike interest rates by 50 bps at upcoming meetings. Moreover, there was a general agreement about reducing the Fed's massive near $9 trillion balance sheet at a maximum pace of $95 billion per month to tighten financial conditions.

This, along with worries that the recent surge in commodity prices would put upward pressure on the already higher consumer inflation, pushed the US Treasury bond yields to multi-year peaks. The combination of supporting factors assisted the USD to extend its one-week-old uptrend and jump to the highest level since May 2020.

Friday's downfall could further be attributed to some technical selling below the very important 200-day SMA. That said, a goodish recovery in the equity markets held back traders from placing aggressive bullish bets around the safe-haven greenback. This could help limit further losses for the perceived riskier kiwi, at least for now.

In the absence of any major market-moving economic releases from the US, the US bond yields will continue to play a key role in influencing the USD price dynamics. Traders will further take cues from developments surrounding the Russia-Ukraine saga, which would drive the market risk sentiment and provide some impetus to the NZD/USD pair.

Technical levels to watch