The NZD/USD pair seesawed between tepid gains/minor losses through the early part of the European session and was last seen trading in the neutral territory, just above mid-0.7100s. The pair struggled to capitalize on its gains recorded over the past two trading sessions and witnessed some selling near the 0.7175 resistance zone on Tuesday. A softer risk tone turned out to be a key factor that weighed on the perceived riskier kiwi, though the downside remains cushioned. Investors turned cautious amid growing acceptance that rising inflationary pressures could force major central banks to hike interest rates earlier than anticipated. The nervousness prompted some profit-taking in the equity markets following the recent strong runup to record high levels.
Meanwhile, the risk-off impulse, along with the Fed's dovish outlook triggered a fresh leg down in the US Treasury bond yields. This, in turn, forced the US dollar to prolong its retracement slide from YTD tops touched on Friday and helped limit deeper losses for the NZD/USD pair.
Apart from this, rising bets for another rate hike by the RBNZ should act as a tailwind for the major and attract some dip-buying at lower levels. That said, traders might refrain from placing fresh bullish bets ahead of Wednesday's release of the US consumer inflation figures.
The markets have been pricing in the possibility of an interest rate hike move by the Fed in 2022 amid worries about a faster rise in inflation. The speculations were reaffirmed by the overnight hawkish comments by a slew of FOMC members, signalling that the central bank could raise rates.
The US CPI report for October will influence Fed rate hike expectations and influence the USD price dynamics, which, in turn, should provide a fresh directional impetus to the NZD/USD pair. In the meantime, traders might take cues from Tuesday's release of the US Producer Price Index (PPI) and Fed Chair Jerome Powell's remarks later during the early North American session.