NZD/USD rallies to 0.6250 area amid broad-based USD weakness, positive risk tone

• NZD/USD gains strong positive traction on Tuesday amid the emergence of fresh USD selling.
• Bets for less aggressive Fed rate hikes and a positive risk tone weigh on the safe-haven buck.
• The fundamental backdrop supports prospects for a further appreciating move for the major.

The NZD/USD pair catches aggressive bids on Tuesday and stalls its recent pullback from the vicinity of the 0.6300 mark, or over a three-month high touched last week. The intraday rally remains uninterrupted through the first half of the European session and lifts spot prices back closer to mid-0.6200s.

The US Dollar struggles to capitalize on the previous day's solid rebound from the very important 200-day SMA and meets with a fresh supply, which, in turn, provides a goodish lift to the NZD/USD pair. A dovish assessment of the November FOMC meeting minutes released last week cemented market bets for a relatively smaller 50 bps rate hike in December. This triggers a fresh leg down in the US Treasury bond yields and continues to undermine the greenback.

Apart from this, a modest recovery in the global risk sentiment is seen as another factor undermining the safe-haven USD and benefitting the risk-sensitive Kiwi. Investors turn optimistic amid speculation that the Chinese government is considering scaling back its strict anti-COVID policies. This is evident from a stable performance in the European equity markets, though worries about a deeper global economic downturn might cap any positive move.

Furthermore, the overnight hawkish remarks by Fed officials could lend some support to the USD. It is worth recalling that St. Louis Fed President James Bullard, New York Fed President John Williams and Fed Vice Chair Lael Brainard reiterated that more rate hikes were warranted to combat inflation. That said, an unprecedented 75 bps rate hike by the Reserve Bank of New Zealand (RBNZ) last week favours the NZD/USD bulls and supports prospects for additional gains.

Market participants now look forward to the Conference Board's US Consumer Confidence Index, due for release later during the early North American session. This, along with the US bond yields and the broader market risk sentiment, will influence the USD and provide some impetus to the NZD/USD pair. The focus, however, will remain on Fed Chair Jerome Powell's speech on Wednesday and this week's important US economic data, including the NFP report on Friday.

Technical levels to watch