NZD/USD drops to over one-week low, breaks through trading range support near mid-0.6400s

• NZD/USD remains under some selling pressure for the second successive day on Tuesday.
• The cautious mood benefits the safe-haven greenback and weighs on the risk-sensitive Kiwi.
• Bets for smaller Fed rate hikes might cap the USD and help limit the downside for the major.

The NZD/USD pair adds to the previous day's modest losses and remains under some selling pressure for the second successive day on Tuesday. Spot prices drop to over a one-week low during the first half of the European session, with bears looking to extend the downward trajectory further below horizontal support near mid-0.6400s.

The prevalent cautious mood provides a modest lift to the safe-haven US Dollar and turns out to be a key factor exerting pressure on the NZD/USD pair. Despite the better-than-expected Chinese macro data released earlier this Tuesday, investors remain uncertain about a strong economic recovery - amid the worst yet COVID-19 outbreak in the country. This, in turn, dents demand for perceived riskier assets, including the Kiwi.

That said, a fresh leg down in the US Treasury bond yields might keep a lid on the USD and help limit losses for the NZD/USD pair, at least for the time being. The markets now seem convinced that the Fed will soften its hawkish stance and deliver a smaller 25 bps rate hike at the end of a two-day policy meeting on Wednesday. This, in turn, drags the US bond yields lower and should hold back the USD bulls from placing fresh bets.

Heading into the key central bank event risk, the aforementioned fundamental backdrop makes it prudent to wait for strong follow-through selling before confirming that the NZD/USD pair has topped out. Next on tap is the US macro data - the Chicago PMI and the Conference Board's Consumer Confidence Index. This, along with the broader risk sentiment, will influence the USD and provide some impetus to the NZD/USD pair.

From a technical perspective, weakness below the 0.6450 area marks a breakdown through a one-week-old trading range and supports prospects for deeper losses. Traders, however, might prefer to move to the sidelines and await the highly-anticipated FOMC policy decision on Wednesday before determining the next leg of a directional move for the NZD/USD pair.

Technical levels to watch