NZD/USD remains on the defensive amid weaker risk tone, holds above 0.6400 mark

• NZD/USD trades with modest losses on Thursday, though the downside remains cushioned.
• Looming recession risks weigh on investors’ sentiment and undermine the risk-sensitive Kiwi.
• Subdued USD price action lends some support to the major and helps limit any deeper losses.

The NZD/USD pair edges lower during the Asian session on Thursday and moves away from its highest level since June 2022, around the 0.6530 area touched the previous day. Spot prices, however, manage to hold above the 0.6400 mark, making it prudent to wait for strong follow-through selling before positioning for any further intraday downfall.

The weaker US macro data released on Wednesday adds to worries about a deeper global economic downturn and continues to weigh on investors' sentiment. This is evident from a softer tone around the equity markets and acts as a headwind for the risk-sensitive Kiwi, which reacts little to news that Prime Minister Jacinda Ardern will step down next month. That said, subdued US Dollar price action lends some support to the NZD/USD pair and helps limit the downside, at least for the time being.

A further decline in the US Treasury bond yields, amid firming expectations for a less aggressive policy tightening by the Fed, keeps the USD bulls on the defensive. In fact, the markets now seem convinced that the US central bank will soften its stance and have been pricing in a smaller 25 bps rate hike in February. The bets were reaffirmed by the US data, showing that retail sales in December fell by the most in a year and manufacturing output recorded its biggest drop in nearly two years.

That said, several FOMC members indicated on Wednesday that they will push on with more interest rate hikes even as inflation shows signs of easing and economic activity is slowing. Apart from this, looming recession risks should benefit the greenback's relative safe-haven status and exert some downward pressure on the NZD/USD pair. Traders now look to the US economic docket, featuring the Philly Fed Manufacturing Index, the usual Weekly Initial Jobless Claims and housing market data.

This, along with speeches by Fed officials and the US bond yields, might influence the USD price dynamics later during the early North American session. Apart from this, traders will take cues from the broader risk sentiment to grab short-term opportunities around the NZD/USD pair. Nevertheless, the mixed fundamental backdrop warrants some caution before placing aggressive directional bets.

Technical levels to watch