SYDNEY: The Australian and New Zealand dollars edged higher on Friday as investors piled into wagers for early and aggressive rate cuts in the United States and Europe, stoking a sizeable rally in local bonds.

Gains were restrained by news of US and UK strikes on Houthi bases in the Red Sea region, which dampened risk sentiment across markets.

The Aussie was up 0.2% at $0.6698, having been as low as $0.6647 at one stage overnight, but faces stiff resistance around $0.6735.

Likewise, the kiwi dollar had returned to $0.6240 from a trough of $0.6196, but could struggle to break resistance at $0.6274.

Both currencies had slipped after US inflation figures disappointed on the high side on Thursday, but soon rallied as markets bet on rate cuts anyway.

The implied probability of a Federal Reserve easing as early as March rose to 76%, from 68% before the data, while short-term Treasury yields dived 10 basis points.

Local markets followed, and Australian three-year bond futures climbed 8 ticks to 96.370, after being as low as 96.230 at one stage.

The Aussie also briefly touched a one-month high on the euro after dovish comments from European Central Bank (ECB) President Christine Lagarde reinforced expectations of a rate cut as early as April.

Markets assume the Reserve Bank of Australia (RBA) will move later, with the chance of a quarter-point cut in June now priced at 79%.

Futures imply 50 basis points of easing for all of 2024, compared to 155 basis points for the Fed.

Australia, NZ dollars lean on support, inflation lurches lower

Data on Australian consumer prices for November this week surprised on the downside and suggested inflation for the December quarter would come in under RBA forecasts.

Nomura economist Andrew Ticehurst now expects the core trimmed mean measure of inflation to slow sharply to 4.2% in the fourth quarter, down from 5.2% the previous quarter.

“This is consistent with our view that the RBA will likely cuts its cash rate by more than the market is currently pricing this year,” he added.

“We forecast three 25bp rate cuts, from August this year - August, September and November - returning the cash rate to a roughly neutral 3.60% by late-2024.”

Markets are wagering the Reserve Bank of New Zealand (RBNZ) will likely ease in May, given the country could already be in recession, and cut by 90 basis points over the year.

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