The NZD/USD pair surrendered its intraday recovery gains and dropped to a fresh three-month low, around mid-0.6800s during the early European session.
The pair struggled to capitalize on its attempted recovery move on Thursday, instead met with fresh supply in the vicinity of the 0.6900 mark and turned lower for the fifth successive day. The Reserve Bank of New Zealand (RBNZ) increased its official cash rate (OCR) by 25 basis points on Wednesday, though disappointed investors anticipating a 50 bps hike. This, in turn, was seen as a key factor that continued acting as a headwind for the NZD/USD pair and capped the early uptick.
Bulls seemed unimpressed by a generally positive risk tone, which tends to benefit the perceived riskier kiwi, and even shrugged off some US dollar profit-taking from a 16-month peak. Following the recent strong bullish run, investors seem inclined to lighten their USD bullish bets amid relatively thin liquidity on the back of the Thanksgiving holiday in the US. That said, expectations for an early policy tightening by the Fed should help limit any meaningful USD corrective slide.
Investors seem convinced that the Fed would be forced to tighten its monetary policy sooner rather than later amid rising inflationary pressures. The bets were reinforced by Wednesday’s data, showing that the US PCE Price Index accelerated a 30-year high in October, and hawkish FOMC monetary policy minutes. In fact, policymakers were open to speeding up the tapering of the bond-buying program and moving quickly to raise interest rates if high inflation persists.
Apart from this, concerns about the potential economic fallout from the rising number of COVID-19 cases and the imposition of fresh lockdown measures in Europe should underpin the safe-haven USD. The fundamental backdrop supports prospects for the emergence of some dip-buying around the greenback and an extension of the NZD/USD pair’s downtrend witnessed over the past one month or so. That said, oversold RSI (14) on the daily chart warrants some caution for aggressive bearish traders.