NZD/USD sticks to modest gains around mid-0.6200s, flirts with 200 DMA amid softer USD

• NZD/USD gains traction for the second successive day, though the upside remains limited.
• Sliding US bond yields keeps the USD bulls on the defensive and lends support to the major.
• Looming recession risks, hawkish Fed expectations to limit the USD losses and cap the pair.

The NZD/USD pair attracts some dip-buying near the 0.6225 area on Tuesday and looks to build on the overnight solid bounce from a nearly two-week low. The pair trades around the mid-0.6200s during the early European session, which bulls awaiting a sustained move beyond a technically significant 200-day Simple Moving Average (SMA) before placing fresh bets.

A softer tone surrounding the US Dollar (USD) turns out to be a key factor lending some support to the NZD/USD pair, though any meaningful appreciating move seems elusive. A standoff to raise the federal government's borrowing limit triggers a fresh leg down in the US Treasury bond yields and undermines the Greenback. It is worth recalling that US President Joe Biden expressed confidence that a deal could be done in time ahead of an expected meeting with congressional leaders later today. Republican House of Representatives Speaker Kevin McCarthy, however, said the two sides were still far apart.

The downside for the USD, however, seems cushioned amid fresh speculations that the Federal Reserve (Fed) will stick to its hawkish stance. The bets were lifted by the Michigan survey, which showed that consumers see prices over the next five years climbing at an annual rate of 3.2% 
- the highest since 2011. Furthermore, the overnight hawkish comments by several Fed officials suggest that the US central bank will keep interest rates higher for longer. Apart from this, the prevalent cautious mood around the equity markets should limit losses for the safe-haven buck and cap the upside for the risk-sensitive Kiwi.

The weaker-than-expected Chinese macro data released today pointed to a wobbly post-COVID recovery in the world's second-largest economy and fueled recession fears. Apart from this, concerns about the US debt ceiling temper investors' appetite for riskier assets. This, along with diminishing odds for further rate hikes by the Reserve Bank of New Zealand (RBNZ), amid a slide in inflation expectations for the first quarter, warrants caution for bulls. This makes it prudent to wait for strong follow-through selling before confirming that the NZD/USD pair's recent pullback from a nearly three-month high has run its course.

Market participants now look forward to the US economic docket, featuring the release of monthly Retail Sales figures later during the early North American session. This, along with the US bond yields and the broader risk sentiment, will influence the USD price dynamics and provide short-term impetus to the NZD/USD pair. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for spot prices is to the downside. Hence, any subsequent move up could be seen as a selling opportunity and runs the risk of fizzling out rather quickly.

Technical levels to watch