NZD/USD surges to three-week tops, around 0.7100 on RBNZ rate hike view

• RBNZ rate hike expectations provided a strong boost to NZD/USD on Tuesday.
• Fading hopes for an earlier policy tightening by the Fed weighed on the USD.
• The stage seems set for a move towards testing 100-day SMA, near mid-0.7100s.

The NZD/USD pair jumped to near three-week tops during the early European session, with bulls now looking to build on the momentum further beyond the 0.7100 mark.

Following the previous day's subdued/range-bound price action, the NZD/USD pair caught some aggressive bids on Tuesday and was supported by a combination of factors. Investors brought forward their expectations for a rate hike by the RBNZ after a business survey in New Zealand showed a sharp improvement in confidence. This, in turn, was seen as a key factor that provided a strong lift to the kiwi.

On the other hand, the US dollar remained on the defensive amid easing fears of an earlier than anticipated policy tightening by the Fed. An unexpected rise in the US unemployment rate overshadowed the big beat on the headline NFP print and suggested that the Fed will wait before tapering its asset purchases. Hence, the market focus will remain glued to Wednesday's release of the latest FOMC meeting minutes.

It is worth recalling that the Fed surprised investors at the end of the June meeting and brought forward its timetable for the first post-pandemic interest rate hike. The minutes will now be looked upon for fresh clues about the Fed's monetary policy outlook. This will play a key role in driving the greenback in the near term and assist investors to determine the next leg of a directional move for the NZD/USD pair.

Meanwhile, Tuesday's strong momentum could further be attributed to some technical buying on a sustained move back above the very important 200-day SMA. With the latest leg up, the NZD/USD pair has now rallied over 150 pips from the pre-NFP swing lows to levels just below mid-0.6900s and seems poised to appreciate further. Hence, some follow-through strength towards 100-day SMA, around mid-0.7100s, looks a distinct possibility.

Market participants now look forward to the US economic docket, highlighting the release of the ISM Services PMI. The data might influence the USD price dynamics and produce some short-term trading opportunities around the NZD/USD pair later during the early North American session.

Technical levels to watch