Australia and New Zealand dollars firmed as markets raise rate expectations

SYDNEY, July 20 (Reuters) – The Australian and New Zealand dollars were looking to rally for a fourth consecutive session on Wednesday after markets reduced the chances of more aggressive rate hikes to come as central banks around the world rushed to catch up with inflation.

The Aussie was up at $0.6901, after gaining 1.3% on Tuesday to break resistance around $0.6855. The rebound took it away from last week’s two-year low of $0.6682 and set up a test of chart resistance at the $0.6910/$15 area.

The Kiwi Dollar hit $0.6238, after climbing 1.1% overnight and away from its recent low of $0.6061. It is facing chart resistance around $0.6290.

Both had benefited from a pullback in the U.S. dollar triggered by a Reuters report that the European Central Bank was considering raising interest rates by 50 basis points at its policy meeting on Thursday.

The report also fueled talk that the Reserve Bank of Australia (RBA) could pick up the pace of tightening by hiking 75 basis points at its policy meeting in August.

The markets are implying about a 30% chance of such a cash rate move of 1.35%, and peaking next year at 3.75% or higher.

RBA Governor Philip Lowe stressed on Wednesday that higher rates were needed to anchor inflation expectations and suggested the neutral level for policy was at least 2.5%.

“While this is a tight call, we continue to expect the RBA to raise the cash rate by 75bps in August and 50bps in September, before slowing the pace. increases to reach a modest rate of contraction of 3.35% by the end of the year,” said Andrew Boak, economist at Goldman Sachs.

Much could hinge on what consumer price figures for the second quarter show next week, with analysts expecting annual inflation to pick up again sharply to over 6%.

A high reading would follow the recent surprise drop in unemployment to a 48-year low of 3.5%.

“Together, they could incentivize the RBA to consider a bigger rate hike in August to get back to a neutral setting a little faster,” said Tapas Strickland, chief economics officer at NAB.

“Our current forecast is 50bps in August and 25bps in September, November and February, but the risk is growing that the RBA sees the need to bring rates back to the broadly neutral level of 2.6% sooner. provided that.”

Bond markets are more expensive, with three-year yields at 3.27% climbing 19 basis points last week. (Editing by Jacqueline Wong)