By Cecile Lefort and Rebecca Howard
SYDNEY/WELLINGTON, Jan 27 (Reuters) - The Australian dollar was squeezed higher on Wednesday after one measure of inflation came slightly above forecasts, even as restrained price pressures overall suggested there was room for further cuts in interest rates.
The New Zealand dollar NZD=D4 consolidated recent gains as investors awaited the outcomes of U.S. and New Zealand central bank decisions this week.
The Australian dollar AUD=D4 rose to $0.7030, from just below 70 cents, pulling further away from a seven-year trough of $0.6828 touched last week. Resistance was found around $0.7050, a level that has proved difficult to breach in recent weeks. A break would target $0.7080.
While Australian core inflation slowed to the floor of the central bank's target range, speculators had been positioned for a weaker number. L3N15A5KJ
"The main focus for the market was the trimmed mean CPI which came above expectations," said Sean Callow, a senior currency strategist at Westpac.
"It was a small miss but that was enough for a market that was probably thinking more about a downside surprise."
Interbank futures 0#YIB: dipped with investors giving a 60 percent chance of an interest rate cut by May, from 84 percent before the data. They remain fully priced for a move in the second half of the year.
The Reserve Bank of Australia holds its monthly policy meeting on Feb. 2 and is widely expected to keep rates at a record low of 2.0 percent.
The New Zealand dollar NZD=D4 was steady at $0.6490, having bounced from a low of $0.6435 hit overnight. It was briefly troubled by news Fitch had lowered its outlook on New Zealand's credit rating to stable from positive. Reserve Bank of New Zealand holds a policy meeting on Thursday and is widely expected to keep rates at 2.5 percent. Yet pressure for a cut is building as the economy teeters on the verge of deflation. will make the tone of RBNZ Governor Graeme Wheeler's policy statement important.
"What he could do is warn of the risks that lie ahead and, should things continue to deteriorate, the policy response may well be to cut rates," said Mark Johnson a private client manager at OM Financial Ltd.
New Zealand government bonds 0#NZTSY= gained, sending yields 2.5 basis points lower at the long end of the curve.
Australian government bond futures were mixed, with the three-year bond contract YTTc1 down 4 ticks at 98.060. The 10-year contract YTCc1 was half a tick higher at 97.3100, while the 20-year contract YXXc1 was 2 ticks firmer at 96.8300. (Editing by Shri Navaratnam)