NZD/USD advances slightly amid weaker dollar, lacks bullish conviction

• NZD/USD manages to hold above the 0.6300 level amid modest US dollar weakness.
• Lack of hawkish signals from Powell and declining US bond yields weigh on the USD.
• Softer risk appetite amid looming recession risks could cap gains in the risk-sensitive NZD.

The pair NZD/USD struggles to gain significant traction on Wednesday and remains confined to a range above the 0.6300 level during the first half of the European session. At time of writing, the pair is trading at 0.6333, up 0.19% on the day.

In general, the softer tone around the stock markets is seen as a key factor acting as a headwind for the risk-sensitive NZD, although modest US dollar weakness lends support to the NZD/USD pair. Market sentiment remains fragile amid the concern about economic headwinds from rising borrowing costs, the COVID-19 outbreak in China, and the protracted war between Russia and Ukraine. Apart from this, fears of worsening US-China relations dampen investor appetite for riskier assets.

The dollar, meanwhile, is undermined by speculation about an imminent pause in the monetary policy tightening cycle from the Fed later this year. Indeed, Fed Chairman Jerome Powell offered no sign of being hawkish on Tuesday, reiterating that the disinflation process was already underway. This, in turn, fuels speculation that interest rates may not rise much higherwhich is evident in a further downward movement in US Treasury yields and puts some downward pressure on the USD.

However, the lack of strong buying interest warrants some caution on the part of the pair’s bulls and before confirming that the recent pullback from the highest level since June 2022 is over. Meanwhile, the post-NFP break below the 0.6400 level suggests the path of least resistance for NZD/USD is to the downside. Therefore, a further move higher could be seen as a selling opportunity and is likely to remain limited in the absence of any relevant US data on Wednesday.

Technical levels to watch