NZD/USD witnessed some follow-through selling on Monday and dropped to a near one-month low. Aggressive Fed rate hike bets, the risk-off mood benefitted the safe-haven USD and exerted pressure. Acceptance below the 0.6300-0.6290 area would make the pair vulnerable to challenging the YTD low. The NZD/USD pair prolonged its recent sharp pullback from the 0.6575 area, or a near two-month high touched earlier this month and opened with a bearish gap on Monday. The bearish pressure remained unabated through the first half of the European session and dragged spot prices below the 0.6300 mark, or the lowest level since May 19.
Stronger US consumer inflation figures released on Friday reaffirmed market bets that the Fed would tighten its monetary policy at a faster pace. This led to an extended selloff in the US bond markets, which pushed the yield on the 2-year Treasury note - seen as a proxy for the Fed's policy rate - to 3% for the first time since 2008. Adding to this, the yield on the benchmark 10-year US government bond shot to the highest level since 2018 and provided a strong boost to the US dollar, which, in turn, exerted downward pressure on the NZD/USD pair.
Apart from the relentless rise in the US Treasury bond yields, the prevalent risk-off mood was seen as another factor that benefitted the greenback's relative safe-haven status. The market sentiment remains fragile amid concerns that a more aggressive policy tightening by major central banks to curb soaring inflation would pose challenges to global economic growth. This, in turn, took its toll on the risk sentiment, which was evident from a sea of red across the equity markets and further contributed to driving flows away from the risk-sensitive kiwi.
With the latest leg down, the NZD/USD pair now seems to have found acceptance below the 0.6300 mark and remains vulnerable to depreciating further. Hence, a subsequent fall towards retesting the YTD low, around the 0.6215 region touched in May, now looks like a distinct possibility. Traders, however, might refrain from placing aggressive bearish bets ahead of the outcome of the FOMC meeting. The Fed is scheduled to announce its decision on Wednesday, which will influence the near-term USD price dynamics and provide a fresh directional impetus to the NZD/USD pair.