NZD/USD recovers a few pips from its lowest level since November, not out of the woods yet

• NZD/USD drops to over a two-month low and is pressured by a combination of factors.
• Geopolitical tensions, along with mixed cues from China, act as a headwind for the Kiwi.
• The blockbuster US NFP smashed hopes for an early Fed rate cut and underpin the USD.

The NZD/USD pair kicks off the new week on a downbeat note and drops to the 0.6050-0.6045 region, or its lowest level since November 24 during the Asian session. Spot prices, however, manage to rebound a few pips in the last hour, though the upside potential seems limited in the wake of mixed cues from China and the underlying bullish sentiment surrounding the US Dollar (USD).

China Securities Regulatory Commission (CSRC) vowed on Sunday to prevent abnormal fluctuations and said that would guide more medium- and long-term funds into the market and crack down on illegal activities including malicious short selling and insider trading. The CSRC, however, offered no specifics on how they plan to do so. This, along with geopolitical tensions, offsets the recent optimism led by the People's Bank of China's (PBoC) move to cut the reserve requirement ratio (RRR) by 50 bps, which is expected to pump in CNY1 trillion in the economy.

In the latest developments, media reports suggest that Hamas is set to reject the Gaza ceasefire deal proposed in Paris. Adding to this, Israel's Prime Minister Benjamin Netanyahu said that the country will not end the war before it completes all of its goals, which are the elimination of Hamas, the return of all the kidnapped people, and the promise that Gaza will not pose a threat. Moreover, US Central Command said forces conducted a strike in self-defence against a Houthi a land attack cruise missile and struck four anti-ship cruise missiles prepared to launch against ships in the Red Sea.

Meanwhile, data published by Caixin earlier today showed that China's Services PMI remained in expansionary territory for 13 straight months and came in at 52.7 for January, though failed to influence antipodean currencies, including the Kiwi. The USD, on the other hand, touched its highest level since December 11 on Monday in the wake of expectations that the Federal Reserve (Fed) will keep interest rates higher for longer. Friday's upbeat US jobs report suggests that the economy may be running too hot for the Fed to cut rates without risking an inflationary rebound.

The hawkish outlook remains supportive of a further rise in the US Treasury bond yields and continues to act as a tailwind for the buck, which, in turn, should cap the upside for the NZD/USD pair. Market participants now look to the release of the US ISM Services PMI, which, along with the broader risk sentiment, should influence the Greenback and provide some impetus. The aforementioned fundamental backdrop, meanwhile, suggests that the path of least resistance for the currency pair is to the downside and attempted recovery runs the risk of fizzling out rather quickly.

Technical levels to watch