NZD/USD hangs near multi-week low, focus remains on US CPI ahead of RBNZ

• NZD/USD managed to defend and stage modest recovery from the 0.6800 neighbourhood.
• Hawkish Fed expectations pushed the USD to a near two-year high and capped the upside.
• The downside seems limited ahead of the US CPI on Tuesday and the RBNZ on Wednesday.

The NZD/USD pair seesawed between tepid gains/minor losses through the early European session and was last seen trading in neutral territory, around the 0.6825 region.

The pair attracted some buying in the vicinity of the 0.6800 mark and staged modest intraday recovery from the four-week low touched earlier this Tuesday. The uptick, however, lacked follow-through and ran out of steam ahead of the mid-0.6800s amid sustained US dollar buying interest, bolstered by the Fed's hawkish outlook.

The markets seem convinced that the Fed will tighten its policy at a faster pace and have been pricing in a 50 bps rate hike over the next two meetings. The bets were reaffirmed by the comments from Chicago Fed President Charles Evans, saying that an accelerated pace of interest-rate increases to combat inflation is worth debating.

This, along with concerns that the recent surge in commodities will put upward pressure on already high consumer prices, pushed the US Treasury bond yields to a fresh multi-year peak. Apart from this, a generally weaker trading sentiment around the equity markets lifted the USD to its highest level since May 2020 and capped the NZD/USD pair.

The downside, however, remains cushioned, at least for the time being, amid expectations for a 50bp rate hike move by the Reserve Bank of New Zealand (RBNZ) on Wednesday. Investors might also refrain from placing aggressive directional bets and prefer to wait for the US CPI report, due for release later during the early North American session.

That said, sustained weakness below the 0.6800 mark will be seen as a fresh trigger for bearish traders and set the stage for an extension of the NZD/USD pair’s recent pullback from the YTD low. The downward trajectory could then drag spot prices further towards the next relevant support, around the 0.6730-0.6725 region, or March swing low.

Technical levels to watch