NZD/USD flirts with daily low around mid-0.6100s, softer USD helps limit losses

• NZD/USD drifts lower during the Asian session, though the downside seems limited.
• The worsening US-China relations turns out to be a key factor weighing on the Kiwi.
• The upbeat market mood keeps the USD bulls on the defensive and lends support.

The NZD/USD pair extends the overnight rejection slide from the 0.6200 mark and remains under some selling pressure through the Asian session on Wednesday. Spot prices drop to a fresh daily low in the last hour and currently trade around mid-0.6100s, down 0.15% for the day.

Reports that the Biden administration is considering new restrictions on exports of artificial intelligence chips to China fuel worries about the worsening relations between the world's two largest economies. This, in turn, is seen as a key factor driving flows away from antipodean currencies, including the Kiwi. The US Dollar (USD), on the other hand, remains on the defensive for the third straight day and might limit the downside for the NZD/USD pair, at least for the time being.

China's Premier Li Qiang told delegates at the World Economic Forum in Tianjin on Tuesday that economic growth in the second quarter will be higher than the first and is expected to reach the annual projected target of around 5%. Apart from this, the upbeat US macro data helps ease fears of a global economic downturn and boosts investors' confidence. This led to the overnight positive move in the US equity markets and exerts some downward pressure on the safe-haven Greenback.

That said, the Federal Reserve's (Fed) hawkish outlook might continue to act as a tailwind for the USD and supports prospects for a further intraday depreciating move for the NZD/USD pair. In fact, the Fed earlier this month signalled that borrowing costs may still need to rise as much as 50 bps by the end of this year. Moreover, the markets have fully priced in another 25 bps lift-off at the July FOMC meeting, which continues to lend support to the US Treasury bond yields and the USD.

Hence, the focus will remain glued to Fed Chair Jerome Powell's comments during a panel discussion at the ECB Forum on Central Banking in Sintra on Wednesday and Thursday. Investors will look for clues about the Fed's future rate-hike move, which, in turn, will drive the USD demand and provide some meaningful impetus to the NZD/USD pair. The market attention will then shift to the release of the Fed's preferred inflation gauge - the US Core PCE Price Index on Friday.

Technical levels to watch