NZD/USD remains defensive amid weaker risk tone, dips below 0.6400

• NZD/USD moves lower on Thursday, though the decline remains muted.
• The looming risk of a recession weighs on investor sentiment and weakens the risk-sensitive NZD.
• Further weakness around the USD offers some support for the pair and helps limit losses.

The pair NZD/USD moves lower during the European session on Thursday and extends its retreat from its highest level since June 2022, around the 0.6530 area touched the previous day. At the time of writing, the pair falls below the 0.6400 levellosing more than 0.70% on the day, but it is prudent to wait for strong continuation selling before positioning for any further intraday decline.

Weak US macroeconomic data released on Wednesday exacerbates fears of a deeper global economic recession and continues to weigh on investor sentiment. This is evidenced by a softer tone around equity markets and acts as a headwind for the risk-sensitive NZD, which has reacted little to the news that New Zealand Prime Minister Jacinda Ardern to resign next month. That being said, the weakness around the US dollar is providing some support to the NZD/USD pair and helping to limit the downside, at least for now.

A further drop in US Treasury yields, amid increasingly firm expectations of less aggressive monetary policy tightening by the Fed, keeps USD bulls on the back foot. In fact, the markets now seem convinced that the US Central Bank will soften its stance and have been pricing in a lower rate hike of 25 basis points in February. Expectations were bolstered by US data, which showed December retail sales posted the biggest drop in a year and manufacturing output its biggest drop in nearly two years.

However, several members of the FOMC indicated on Wednesday that they will continue to raise interest rates, despite inflation showing signs of moderation and economic activity slowing down. Aside from this, looming recession risks should benefit the safe-haven USD and put some downward pressure on the NZD/USD pair. The US economic calendar will see the Philadelphia Fed manufacturing index, weekly jobless claims and housing market data.

This, along with speeches by some Fed officials and US bond yields, could influence USD price action later in the American session. Other than this, traders will be guided by broader risk sentiment to take advantage of some short-term opportunities around the NZD/USD pair. However, the mixed fundamental background warrants some caution before entering aggressive directional positions.

NZD/USD technical levels