NZD/USD clings to intraday gains around 0.6170 area on weaker USD, positive risk tone

• NZD/USD kicks off the new week on a positive note and snaps a two-day losing streak.
• A combination of factors undermines the USD and lends some support to the major.
• The Fed’s hawkish outlook should limit USD losses and keep a lid on any further gains.

The NZD/USD pair gains strong positive traction during the Asian session on Monday and climbs to the 0.6175 region in the last hour, snapping a two-day losing streak to a one-and-half-week low.

The US Dollar (USD) comes under some selling pressure on the first day of a new week and for now, seems to have stalled its recent recovery from the lowest level since May 11 touched last Thursday. A modest downtick in the US Treasury bond yields is seen as a key factor weighing on the Greenback and lending support to the NZD/USD pair. Apart from this, a positive tone around the US equity futures further seems to undermine the safe-haven buck and benefits the risk-sensitive Kiwi.

That said, worries about a global economic downturn, particularly in China, should keep a lid on any optimism. The fears were further fueled by the fact that S&P Global trimmed its forecasts for China’s GDP to 5.2% from 5.5% this year. This comes on the back of the recent downgrades by many global banking giants such as Nomura, Citibank, UBS and Goldman Sachs. Apart from this, the Federal Reserve's (Fed) hawkish outlook should limit the USD losses and keep a lid on the NZD/USD pair.

It is worth recalling that the Fed earlier this month decided to pause its rate-hiking cycle but signalled that borrowing costs may still need to rise as much as 50 bps by the end of this year. Furthermore, Fed Chair Jerome Powell reiterated that the central bank will raise interest rates again this year, albeit at a "careful pace", to contain high inflation. Powell added that the Fed doesn't see rate cuts happening any time soon and will wait until it is confident that inflation is moving down to the 2% target.

Apart from this, the Reserve Bank of New Zealand's (RBNZ) explicit signal that it was done with its most aggressive hiking cycle since 1999 warrants caution before placing aggressive bullish bets around the NZD/USD pair. In the absence of any relevant macro data from the US, this makes it prudent to wait for strong follow-through buying to confirm that the recent sharp pullback from the vicinity of mid-0.6200s, or the monthly swing high, has run its course. Market participants now look to this week's important release of the US Core PCE Price Index - the Fed's preferred inflation gauge on Friday.

Technical levels to watch