• NZD/USD was seen oscillating in a narrow trading band through the early European session.
• A modest USD pullback extended some support; a cautious market mood capped the upside.
• Investors now eye US CPI report and FOMC meeting minutes for a fresh directional impetus.

The NZD/USD pair lacked any firm directional bias and seesawed between tepid gains/minor losses, below mid-0.6900s through the early European session.

A softer tone around the US Treasury bond yields triggered a modest US dollar corrective pullback from one-year tops touched in the previous day. This, in turn, was seen as a key factor that assisted the NZD/USD pair to find some support near the 0.6920 region on Wednesday. That said, the prevalent cautious mood around the equity markets kept a lid on any meaningful upside for the NZD/USD pair, at least for the time being.

Worries about a faster than expected rise in inflation and signs of a slowdown in the global economic recovery have been fueling concerns about stagflation. This, along with fears of a spillover from China Evergrand's debt crisis, continued weighing on investors' sentiment. Apart from this, prospects for an early policy tightening by the Fed helped limit the USD losses and further collaborated to cap gains for the NZD/USD pair.

Investors seem convinced that the Fed will begin rolling back its massive pandemic-era stimulus as soon as November. The markets have also started pricing in the possibility of an interest rate hike in 2022 amid expectations that the recent widespread rally in commodity prices will stoke inflation. Hence, the market focus will remain on Wednesday's release of the US consumer inflation figures for the month of September.

This will be followed by the FOMC meeting minutes later during the US session. This would assist investors to gauge the Fed's path on normalizing monetary policy, which will influence the near-term USD price dynamics and provide a fresh directional impetus to the NZD/USD pair. In the meantime, the broader market risk sentiment will be looked upon for some short-term trading opportunities.

Technical levels to watch