NZD/USD rebounds from multi-week low and retakes 0.6100, upside potential seems limited

• NZD/USD stages a modest short-covering bounce from a multi-week low touched on Thursday.
• Hawkish Fed expectations continue to underpin the USD and should act as a headwind for the pair.
• Recession fears might also contribute to capping any meaningful recovery for the risk-sensitive kiwi.

The NZD/USD pair stalls its intraday slide near the 0.6075 region and recovers a few pips from the lowest level since July 14 touched this Thursday. Spot prices move back above the 0.6100 mark during the early European session, though any meaningful upside still seems elusive.

The US dollar struggles to gain any meaningful traction and prolongs its consolidative price move just below the 20-year peak set earlier this week. Apart from this, the slightly oversold RSI on the 1-hour chart offers some support to the NZD/USD pair and contributes to the modest bounce. That said, hawkish Fed expectations continue to act as a tailwind for the USD. This, along with the prevalent risk-off mood, should keep a lid on any meaningful recovery for the major, at least for the time being.

The markets seem convinced that the Fed will stick to its aggressive policy tightening path and have been pricing in a supersized 75 bps rate hike at the September FOMC meeting. The bets were reaffirmed by the recent hawkish remarks by several Fed officials, which remain supportive of a further rise in the US Treasury bond yields. In fact, the yield on the 2-year US government bond, which is highly sensitive to rate hike expectations, rose to a 15-year high and favours the USD bulls.

Apart from this, growing worries about a deeper global economic downturn might further contribute to capping the upside for the risk-sensitive kiwi. Thursday's disappointing release of the Caixin/Markit Chinese Manufacturing PMI, which fell to 49.5 in August, added to recession fears and weighed on investors' sentiment. This, in turn, suggests that the path of least resistance for the NZD/USD pair is to the downside and any subsequent move up might still be seen as a selling opportunity.

Market participants now look forward to the US economic docket, featuring Weekly Initial Jobless Claims and the ISM Manufacturing PMI. This, along with the US bond yields and the broader risk sentiment, will influence the USD price dynamics and provide some impetus to the NZD/USD pair. The market focus, however, will remain glued to the closely-watched US monthly employment details for August, popularly known as the NFP report, scheduled for release on Friday.

Technical levels to watch