NZD/USD flirts with the upper end of the range of more than a week around the 0.6400 level

• NZD/USD rises on Tuesday, but fails to break above the 0.6400 zone decisively.
• Upbeat macro data from China is supportive, though a combination of factors caps gains for the pair.
• Recession fears and modest USD strength prevent a significant rally in the pair.

The pair NZD/USD gains some positive traction at the start of the European session on Tuesday, although has difficulty capitalizing on the move above the 0.6400 level. The pair remains stuck in a familiar range held for the past week and a half.

Chinese economic data, better than expected, fueled optimism about the recovery of the world’s second largest economy and provided some support to the NZD/USD pair. In fact, China posted 2.9% growth in the fourth quarter and industrial production exceeded estimates. Furthermore, retail sales contracted less than expected and pointed to a positive trend among consumers.

Having said that, COVID-19 outbreak in China continues to weigh on investor sentiment. This is reflected in a softer tone around equity markets, which benefits the safe-haven USD and acts as a headwind for the risk-sensitive NZD. This, in turn, warrants some caution on the part of aggressive bulls before positioning for any significant move higher for the NZD/USD pair.

In the meantime, USD rally more likely to remain subdued amid growing acceptance that the Fed will soften its hawkish stance amid signs of easing of inflationary pressures. In addition, several Fed officials were in favor of lower rate hikes and reaffirmed their expectations for a 25 basis point hike in February. All of this should slow down the dollar and limit the fall in the NZD/USD pair, at least for now.

The mixed fundamental background could deter traders from taking directional positions around the NZD/USD pair and supports the prospects for a range-limited extension of price action. The Empire State manufacturing index will be published on Tuesday’s agenda. This, coupled with broader risk sentiment, could weigh on the USD and provide some momentum for the pair.

NZD/USD technical levels