By Swati Pandey and Charlotte Greenfield
SYDNEY/WELLINGTON, Jan 25 (Reuters) - The Australian dollar slipped on Wednesday after fourth-quarter inflation came in below expectations, underlining the risk that interest rates were still more likely to move down than up this year.
The Australian dollar AUD=D4 fell 0.5 percent to touch a low of $0.7535. The retreat from $0.7597 came after official data showed consumer prices rose 0.5 percent in the quarter, below expectations for a 0.7 percent rise. inflation also missed forecasts with a 0.4 percent rise, though the annual pace held around 1.5 percent.
The subdued figures saw the Aussie clock its sharpest decline in a week. The currency had been on an uptrend since the beginning of January, hitting a 2-1/2 month peak of $0.7609 earlier this week.
"It keeps the prospect of another rate cut well and truly alive," said Shane Oliver, chief economist at AMP Capital.
"These numbers highlight the downside risks to inflation in Australia and the risk that it will take longer to get back to the 2-3 percent target for inflation."
Underlying inflation has languished below the central bank's target range since the first quarter of 2016, prompting two rate cuts since.
The futures market still sees only a 16 percent 0#YIB: chance of another cut by July, although the prospect of a rate hike later in the year is also slowly fading.
The Aussie slipped 0.4 percent against its New Zealand cousin AUDNZD=R and also underperformed the euro EURAUD=R and the pound GBPAUD=R .
The pound rose 0.8 percent after the British Supreme Court ruled that the government must go through parliament to trigger talks on leaving the European Union. GBP/
The New Zealand dollar NZD=D4 stood at $0.7244, hovering near a ten-week high of $0.7276 hit the previous day.
Investors will keep a close eye on New Zealand consumer price data on Thursday for confirmation inflation had returned to the central bank's target range. ECONNZ
New Zealand, like its Antipodean cousin, has also been struggling with anaemic inflation, forcing the central bank to cut rates three times last year. Zealand government bonds 0#NZTSY= eased, sending yields 7.5 basis points higher at the long end of the curve.
Australian government bond futures were mixed, with the three-year bond contract YTTc1 unchanged at 98.010. The 10-year contract YTCc1 fell 3 ticks to 97.2450. (Editing by Simon Cameron-Moore)