NZD/USD remains confined in range around 0.6200 after the expected PBOC rate cut

• NZD/USD struggles to gain any meaningful traction on Tuesday amid a modest USD uptick.
• A fresh leg up in the US Treasury bond yields and a softer risk tone underpin the Greenback.
• The fundamental backdrop favours bearish traders and supports prospects for deeper losses.

The NZD/USD pair lacks any firm direction and seesaws between tepid gains/minor losses, around the 0.6200 mark through the first half of the Asian session on Tuesday.

The US Dollar (USD) builds on its bounce from over a one-month high touched last Friday and edges higher for the third straight day, which, in turn, is seen as a key factor acting as a headwind for the NZD/USD pair. The USD uptick could be attributed to a goodish pickup in the US Treasury bond yields, bolstered by rising bets for another 25 bps lift-off at the July FOMC meeting. This comes on the back of the Federal Reserve's (Fed) hawkish outlook, signalling that borrowing costs may still need to rise by as much as 50 bps by the end of this year, and continues to lend some support to the buck.

Apart from this, a generally weaker tone around the equity markets further benefits the Greenback's relative safe-haven status and contributes to capping the upside for the risk-sensitive Kiwi. Concerns about a global economic downturn, particularly in China, overshadow reports that China is considering a broad stimulus package to bolster economic support and continues to weigh on investors' sentiment. Furthermore, the People's Bank of China cuts one-year and five-year Loan Prime Rates (LPRs) this Tuesday, though does little to inspire bulls or provide any impetus to the NZD/USD pair.

This, along with the Reserve Bank of New Zealand's (RBNZ) explicit signal that it was done with its most aggressive hiking cycle since 1999, could further undermine the New Zealand Dollar (NZD). Furthermore, New Zealand's Minister of Finance Grant Robertson and the Treasury criticized higher interest rates. However, expectations that the Fed is nearing the end of its policy tightening cycle might cap the USD and help limit losses for the NZD/USD pair, at least for now. Traders might also refrain from placing aggressive bets ahead of Fed Chair Jerome Powell's congressional testimony.

Powell's comments will be closely scrutinized for clues about the Fed's future rate-hike path, which, in turn, will influence the USD price dynamics and help determine the near-term trajectory for the NZD/USD pair. Nevertheless, the aforementioned fundamental backdrop seems tilted in favour of bearish traders and suggests that the recent strong move-up witnessed over the past two weeks or so has run its course. That said, it will still be prudent to wait for some follow-through selling before positioning for any meaningful corrective decline from the monthly peak touched last Friday.

Technical levels to watch