NZD/USD recovers from two-month lows, upside seems limited ahead of FOMC

The NZD/USD pair maintained its bid tone through the early European session and was last seen hovering near the top end of its daily trading range, just below mid-0.7100s.

Having found some support near the 0.7100 mark, the NZD/USD pair regained positive traction on Wednesday and has now reversed the previous day's negative move to two-month lows. The uptick lacked any obvious fundamental catalyst and could be solely attributed to some short-covering move amid a subdued US dollar demand.

A generally softer tone surrounding the US Treasury bond yields failed to assist the greenback to capitalize on the previous day's positive move to one-month tops. That said, expectations of a slightly less dovish Fed might help put a tentative floor under the greenback and cap any further gains for the NZD/USD pair.

Investors might have started pricing in the prospects for an earlier stimulus withdrawal amid worries about rising inflationary pressure. The concerns were further fueled by Tuesday's hotter-than-expected US Producer Price Index. Hence, the key focus will remain on the highly-anticipated FOMC decision, due later during the US session.

Investors will be closely watching for clues about a possible change in the policy outlook and if members have started the discussion to taper the current $120 billion in monthly bond purchases. This will play a key role in driving the USD in the near-term and provide a fresh directional impetus to the NZD/USD pair.

Heading into the key event risk, investors seemed reluctant to take excessive risk. This was evident from a cautious mood around the equity markets, which should further collaborate to cap gains for the perceived riskier kiwi. Hence, it will be prudent to wait for some strong follow-through buying before placing fresh bullish bets.

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