• NZD/USD gained strong positive traction on Monday and recovered further from over a two-year low.
• The recent fall in the US bond yields, stability in the equity markets undermined the safe-haven USD.
• Aggressive Fed rate hike bets, recession fears should limit the USD downtick and cap gains for the pair.

The NZD/USD pair witnessed a short-covering move on the first day of a new week and built on Friday's late rebound from the 0.6150-0.6145 region, or the lowest level since May 2020. The intraday positive move prolonged through the mid-European session and pushed spot prices to the mid-0.6200s.

The recent slump in the US Treasury bond yields turned out to be a key factor that continued acting as a headwind for the US dollar. Apart from this, signs of stability in the financial markets further undermined the greenback's safe-haven status and benefitted the risk-sensitive kiwi.

That said, the worsening global economic outlook might keep a lid on any optimistic move in the markets and offer some support to the buck. This, along with the prospects for a more aggressive policy tightening by the Fed, favours the USD bulls and might cap the upside for the NZD/USD pair.

Investors remain sceptical that major central banks would be able to raise interest rates to curb soaring inflation without affecting global economic growth. Addin to this, the ongoing Russia-Ukraine war and the latest COVID-19 outbreak in China have been fueling worries about a possible recession.

Fed Chair Jerome Powell, meanwhile, reaffirmed last week that the US central bank remains focused on getting inflation under control. Powell added that the US economy is well-positioned to handle tighter policy. This, in turn, should back traders from placing bearish bets around the USD.

Investors might also prefer to wait on the sidelines amid relatively lighter trading volumes on the back of a holiday in the US and wait for this week's key releases from the US. The minutes of the FOMC meeting are due on Wednesday and will be followed by the US jobs data on Friday.

Investors will closely scrutinize the FOMC minutes and the NFP report for clues about the Fed's policy tightening path. This, in turn, will influence the near-term USD price dynamics and help determine the next leg of a directional move for the NZD/USD pair.

Technical levels to watch