The NZD/USD pair remained depressed heading into the European session, albeit has managed to rebound a few pips from the lowest level since October 13. The pair was last seen trading with only modest intraday losses, just below mid-0.6900s.
The pair struggled to capitalize on its intraday positive move, instead met with a fresh supply near the 0.6975 region and turned lower for the third successive day on Tuesday. The slump in New Zealand Retail Sales, by 8.1% in the September quarter, was not as severe as economists had expected, though was enough to weigh on the domestic currency. This, along with a strong bullish sentiment surrounding the US dollar, exerted heavy downward pressure on the NZD/USD pair.
In fact, the key USD Index shot to the highest level since July 2020 during the early part of the trading action and remained well supported by speculations for an early policy tightening by the Fed. US President nominated Jerome Powell to serve as the Fed chairman for a second term. The fact that investors considered the other leading candidate, Lael Brainard, to be the more dovish of the two, the announcement reinforced bets for higher US interest rates.
The Fed funds futures indicate the possibility for an eventual Fed rate hike move by July 2022 and a high likelihood of another raise by November. This, in turn, triggered a sharp overnight rally in the US Treasury bond yields, which continued acting as a tailwind for the buck. Apart from this, concerns over the rising number of COVID-19 cases in Europe and the reimposition of restrictive measures further benefitted the greenback's safe-haven status.
Apart from this, technical selling on a sustained break and acceptance below the 0.7000 psychological mark further contributed to the NZD/USD pair's ongoing decline. Moreover, the markets already seem to have fully priced in another rate hike by the Reserve Bank of New Zealand (RBNZ) at the upcoming meeting on Wednesday. This, in turn, favours bearish traders and supports prospects for an extension of the downward trajectory.
Heading into Wednesday's key central bank event risk, traders might take cues from the release of the flash US PMI prints for November later during the early North American session. The data, along with the US bond yields and the broader market risk sentiment, will influence the USD price dynamics and provide some impetus to the NZD/USD pair.
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