• NZD/USD gained traction for the second straight day and climbed back closer to monthly tops.
• The risk-on mood acted as a tailwind for the perceived riskier kiwi amid a subdued USD demand.
• Hawkish Fed expectations should help limit the USD losses and keep a lid on any further gains.

The NZD/USD pair maintained its bid tone through the Asian session and was last seen hovering near monthly tops, around the 0.6975-80 region.

A combination of supporting factors assisted the NZD/USD pair to build on the previous day's post-US CPI bounce from the 0.6910 support and gain traction for the second consecutive session on Thursday. The prevalent risk-on mood – as depicted by a generally positive tone around the equity markets – benefitted the perceived riskier kiwi amid a subdued US dollar price action.

The greenback witnessed a typical 'buy the rumour, sell the fact' kind of a reaction on Wednesday and reversed its weekly gains to 13-month tops following the release of US consumer inflation figures. The headline US CPI for September rose 0.4%, pushing the yearly rate to 5.4%. The readings were slightly higher than market expectations, though did little to impress the USD bulls.

Investors still seem aligned with the Fed's transitory inflation narrative, which was evident from a further decline in the longer-dated US Treasury bond yields. This, in turn, was seen as another factor that weighed on the buck. That said, expectations for an imminent Fed taper announcement and prospects for an earlier than anticipated interest rate hike helped limit the USD losses.

The minutes of the FOMC monetary policy meeting held in September showed that the Fed remains on track to begin tapering its bond purchases later this year. Moreover, a growing number of policymakers were worried that inflation could persist, forcing investors to bring forward the likely timing of a potential rate hike to September 2022 from December 2022 already priced in.

This makes it prudent to wait for a strong follow-through buying before placing aggressive bullish bets around the NZD/USD pair and confirming a near-term bullish breakout. Market participants now look forward to the US economic docket, featuring the release of Producer Price Index (PPI) and the usual Weekly Initial Jobless Claims data later during the early North American session.

This, along with the US bond yields, will influence the USD price dynamics. Apart from this, traders might further take cues from the broader market risk sentiment for some short-term opportunities around the NZD/USD pair.

Technical levels to watch