July 22 (Reuters) - The Australian and New Zealand dollars were headed on Friday for their best week in several months, buoyed by a more positive market mood and U.S. dollar softening, with a retreat in U.S. rate hike expectations just as they are building up in the Antipodes.
Both currencies slipped in the Asia session on Friday, but were set for solid weekly gains. The Aussie AUD=D3 was last down 0.4% to $0.6908, a gain of 1.7% on the week - the best since late May.
The kiwi NZD=D3 also eased 0.4%, and last bought $0.6225, but was looking to snap seven weeks without a meaningful rise.
The U.S. dollar had fallen overnight after the European Central Bank raised interest rates by more than expected, while mixed U.S. data this week has had traders paring back expectations for a super-size U.S. hike next week.
Data this week showed New Zealand inflation running at a three-decade high. Australian consumer price data is due next week and is expected to be hot.
"The question will be how high is it and whether it's perceived to be enough to warrant a larger-than-50bp hike from the RBA," analysts at ANZ said in a note.
Both National Australia Bank and Westpac on Friday raised their forecasts for the eventual peak in Australia's benchmark cash rate. NAB now expects it to peak at 2.85% by the end of the year, while Westpac sees the peak at 3.35% by February next year. Both previously forecast a peak of 2.6%.
Markets are pricing about a 15% chance of a 75 basis point rate hike in August.
0#RBAWATCH Bonds rose on Friday, following strong demand at auction, but were set to end the week a little lower. Three-year futures YTTc1 were down 10.5 ticks on the week to 96.735. Ten-year futures YTCc1 were down 4.5 ticks on the week to 96.510.
