• NZDUSD is in strong supply on Wednesday amid a modest dollar recovery.
• High US bond yields and a softer risk tone revive demand for the dollar.
• Traders expect the Fed’s statements to provide a bit of a boost ahead of Thursday’s US CPI.

NZDUSD comes under fresh selling pressure on Wednesday and extends the previous day’s rejection drop from the psychological 0.6000 level, or the highest level since 19th Sep. The pair maintains the strongly bid tone during the middle of the European session and is currently sitting near the lower end of its daily range, just above the 0.5900 round level.

A combination of factors is helping the US dollar recover modestly from a multi-week low hit on Tuesday, which, in turn, is seen as a key factor putting downward pressure on NZDUSD. Despite expectations of a less aggressive Fed tightening, bets on a further 50 basis point rate hike in December remain supportive of elevated US Treasury yields. This, coupled with a generally weaker tone around equity markets, offers support to the safe-haven dollar and helps deflect flows from the risk-sensitive Kiwi.

Against the background of growing concerns about a deeper economic recession, uncertainty over the results of the US mid-term elections is dampening investors’ appetite for riskier assets. In fact, opposition Republicans remain favorites to win a majority in the House of Representatives. This could allow them to prevent any further tax increases and limit government spending. Also, the Senate race remains too close. Pivotal battles in Arizona, Georgia and Nevada could determine which party controls the cameras.

With the latest leg down, NZDUSD appears to have stalled the post-NFP recovery for now and remains at the mercy of dollar price dynamics in the absence of any relevant economic data. However, traders will take cues from New York Fed President John Williams and Richmond Fed President Thomas Barkin’s speeches. This coupled with US bond yields and broader risk sentiment will fuel USD demand and provide some lift to the NZDUSD pair. However, attention remains focused on the US consumer inflation numbers due to be released on Thursday.

Technical levels to watch