NZD/USD retreats back closer to mid-0.6700s, focus remains on geopolitics

• NZD/USD regained some positive traction on Wednesday, albeit lacked any follow-through.
• A calmer risk tone benefitted the perceived riskier kiwi and remained supportive of the move.
• Intensifying Russia-Ukraine conflict underpinned the safe-haven USD and capped the upside.

The NZD/USD pair surrendered a major part of its intraday gains and was last seen trading just above mid-0.6700s, up around 0.10% for the day.

As investors assess the impact of aggressive sanctions against Russia over its invasion of Ukraine, a calmer risk tone benefitted the perceived riskier kiwi. This was seen as a key factor that assisted the NZD/USD pair to attract some buying on Wednesday, though the uptick lacked any follow-through amid modest US dollar strength.

The worsening situation in Ukraine continued acting as a tailwind for the safe-haven greenback. In fact, reports indicated that Russia has intensified the bombardment of Ukrainian cities and a large Russian convoy was approaching the capital Kyiv. Apart from this, a goodish rebound in the US Treasury bond yields further underpinned the buck.

Hence, the market focus will remain glued to fresh geopolitical developments and the resumption of the Russia-Ukraine talks on Wednesday. In the meantime, diminishing odds for a 50 bps Fed rate hike move in March might hold back the USD bulls from placing aggressive bets and help limit the downside for the NZD/USD pair, at least for the time being.

The escalation of the Russia-Ukraine conflict now seems to have convinced investors that the Fed would refrain from adopting a more aggressive policy stance to combat stubbornly high inflation. This was reinforced by the recent decline in the US bond yields. In fact, the yield on the benchmark 10-year US government bond dropped over a one-month low on Tuesday.

The mixed fundamental backdrop warrants some caution before positioning for a firm directional move for the NZD/USD pair. Market participants now look forward to the release of the US ADP report and Fed Chair Jerome Powell's semi-annual testimony before the House Financial Services Committee. This, however, is more likely to be overshadowed by the incoming headlines surrounding the Russia-Ukraine saga and might do little to influence the NZD/USD pair.

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