SYDNEY, April 23 (Reuters) - The Australian dollar strengthened on Tuesday as risk appetite continued to recover from a frenetic flight to safety last week, but its upside could be limited as traders brace for a key local reading on inflation.
The Aussie AUD=D3 gained 0.2% to $0.6463, having rebounded 0.5% overnight to recover some of last week's drop of 0.7%. It managed to stand above the 10-day moving average of $0.6454 for the first time since April 10, with resistance around $0.6505.
The kiwi dollar NZD=D3 edged 0.1% higher to $0.5919, after gaining 0.5% overnight, reversing some of the 0.8% drop last week. It is now testing the 10-day moving average of $0.5923, which is the near-term resistance.
With fears of a major conflict escalation in the Middle East easing, traders are shifting their focus back to economic fundamentals. Key to the rate outlook in Australia is the quarterly inflation report due on Wednesday.
Analysts expect the consumer price index ticked up to 0.8% in the first quarter, from 0.6% previously, although the annual rate likely eased to 3.5%, the lowest in two years, due to base effects.
"While the RBA has in the past shown little tolerance for inflation exceeding its forecasts, we do not think this will be enough for it to do an about-turn and consider a hike option at the May meeting, given the moderation in its policy stance," ANZ analysts said.
"Still, the details may make the RBA a little cautious... The upward surprise in US CPI inflation is also prompting markets to reassess how tough the ‘last mile’ back to target will be."
Markets have slashed rate cut expectations globally. Swaps only expect a total of 18 basis points in rate reductions from the Reserve Bank of Australia this year, meaning even one rate cut is not guaranteed.
0#RBAWATCH Across the Tasman Sea, the Reserve Bank of New Zealand is expected to cut fewer than two times this year on surprisingly strong domestically driven inflation, with swaps implying just 35 basis points of easing.
0#RBNZWATCH
