The NZD/USD pair surrendered its modest intraday gains and retreated to the lower end of its daily trading range during the early European session. The pair was last seen hovering just above mid-0.7100s, nearly unchanged for the day.
The pair gained some traction during the early part of the trading action on Tuesday amid the dominant risk-on mood in the markets, which tends to benefit the perceived riskier kiwi. That said, the ongoing US dollar recovery from one-month lows capped the upside for the NZD/USD pair, rather prompted fresh selling at higher levels.
The USD continued drawing some support from growing acceptance about the prospects for an early policy tightening by the Fed. The market expectations were reaffirmed by Fed Chair Jerome Powell on Friday, saying that the US central bank will begin rolling back its massive pandemic-era stimulus by the end of this year.
Moreover, investors have been pricing in the possibility of a potential interest rate hike in 2022 amid worries that the recent widespread rally in commodity prices will stoke inflation. This was reinforced by the recent runaway rally in the US Treasury bond yields, which continued acting as a tailwind for the greenback.
The downside, however, remains cushioned amid rising bets that the RBNZ will hike interest rates further to contain stubbornly high inflation. This warrants some caution for aggressive bearish traders and makes it prudent to wait for a strong follow-through selling before positioning for any further depreciating move.
Market participants now look forward to the US economic docket – featuring the releases of the Conference Board’s Confidence Index, Richmond Manufacturing Index and New Home Sales. This, along with the US bond yields and the broader market risk sentiment, will influence the USD price dynamics and provide some impetus to the NZD/USD pair.
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