- NZD/USD gained strong positive traction on Monday and rallied further from a two-year low.
- The recent fall in US bond yields and the stability of the stock markets undermined the safe haven of the dollar.
- The Fed’s aggressive rate hike bets and recession fears should limit the USD’s decline and cap the pair’s gains.
The pair NZD/USD witnessed a short-covering move on the first day of a new week and built on Friday’s late bounce from the 0.6150-0.6145 area, or the lowest level since May 2020. The positive intraday move lasted until the middle of the European session and pushed the price up to 0.6250.
The recent drop in US Treasury yields proved to be a key factor that continued to act as a headwind against the US dollar. In addition, signs of stability in financial markets further undermined the greenback’s safe-haven status and benefited the risk-sensitive kiwi.
That said, the worsening of the global economic outlook could dampen any bullish moves in the markets and offer some support to the dollar. This, coupled with the prospect of a more aggressive Fed tightening, favors dollar bulls and could limit NZD/USD’s gains.
Investors remain skeptical that major central banks can raise interest rates to curb rising inflation without hurting global economic growth. Additionally, the ongoing war between Russia and Ukraine and the latest outbreak of COVID-19 in China have fueled concerns about a potential recession.
For his part, Fed Chairman Jerome Powell reaffirmed last week that the US central bank remains focused on controlling inflation. Powell added that the US economy is well positioned to handle a tougher policy. This, in turn, should stop traders from placing bearish bets on the dollar.
In addition, investors may prefer to stay on the sidelines amid relatively low trading volumes due to the US holiday, and wait for this week’s key US releases. The minutes of the meeting of the Federal Open Market Committee (FOMC) will be published on Wednesday and the data on employment in the United States on Friday.
Investors will closely examine the FOMC minutes and the NFP report for clues on the Fed’s tightening path. This, in turn, will influence short-term USD price dynamics and help determine the next leg of a directional move for the NZD/USD pair.
Technical levels
Source: Fx Street
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