NZD/USD remains on the defensive, downside seems cushioned amid weaker USD

The NZD/USD pair witnessed some selling on Thursday and moved away from a multi-week high, around the 0.6270-0.6275 region touched the previous day. The pair remained on the defensive through the early European session and was last seen trading around the 0.6225-0.6230 area, just a few pips above the daily low.

Following the recent strong rally of over 200 pips from the 0.6060 area, or the lowest level since May 2020, bulls took a brief pause amid fears about a possible recession. Investors remain concerned that rapidly rising borrowing costs, the Russia-Ukraine war and the latest COVID-19 outbreak in China would pose challenges to global growth. This, in turn, was seen as a key factor that acted as a headwind for the risk-sensitive kiwi, though the emergence of fresh US dollar selling helped limit the downside for the NZD/USD pair.

The USD struggled to capitalize on the previous day's bounce from its lowest level since July amid receding bets for a more aggressive rate hike by the Federal Reserve in July. It is worth recalling that several FOMC members said last week that they will likely stick to a 75 bps rate increase at the upcoming meeting on July 26-27. This, in turn, forced investors to scale back their expectations for a supersized 100 bps rate hike move, bolstered by the continuous surge in the US consumer inflation to a four-decade high in June.

Investors, however, seem convinced that the Fed would be forced to deliver a larger rate hike later this year to curb stubbornly high inflation. This was reinforced by elevated US Treasury bond yields, which should help limit deeper USD losses and continue to act as a headwind for the NZD/USD pair. That said, it would still be prudent to wait for strong follow-through selling before confirming that the recent recovery move has run out of steam. Market participants now look forward to the US macro data for some impetus.

Thursday's US economic docket features the release of the Philly Fed Manufacturing Index and the usual Weekly Initial Jobless  Claims later during the early North American session. This, along with the US bond yields, might influence the USD price dynamics and provide some impetus to the NZD/USD pair. Apart from this, traders will take cues from the broader market risk sentiment to grab short-term opportunities.

Technical levels to watch