SINGAPORE: The Australian and New Zealand dollars fell on Monday, retreating from one-month highs, as worries about the global economic outlook outweighed expectations that a hot Australian inflation reading this week could steepen interest rate hikes.

The Aussie was down 0.53% to $0.6887, off Friday’s high of $0.6976 but comfortably above its two-year trough of $0.6682 hit earlier in July.

Meanwhile, the kiwi was trading at $0.6221, about 0.5% lower from Friday’s close of $0.6253.

Key economic data on the domestic and global front are likely to set the tone, with Australia’s second-quarter consumer inflation data and the Federal Reserve’s policy decision on Wednesday the headliners. Economists polled by Reuters see Australia’s Q2 year-on-year headline inflation hitting 6.3%, the highest since 1990.

Meeting or beating it could support the Aussie by ramping up rate hike expectations. Richard Yetsenga, chief economist at ANZ, sees Q2 inflation accelerating to 6.6% year-on-year, and expects the Reserve Bank of Australia (RBA) to take the cash rate target to a restrictive setting of 3.35% by late 2022, more than 12 months earlier than ANZ’s previous forecast.

Australia, NZ dollars set for best week in months as inflation test looms

“This reflects the strong momentum in the labour market and the clear rise in inflation,” he said.

On Friday, Westpac and National Australia Bank raised predictions for Australia’s benchmark cash rate, on the back of surging inflation and a tight labour market.

A 75 basis-point (bp) RBA hike is priced in for August.

Markets have also fully priced in a 75 basis-point rate hike by the Fed, with a 9.4% chance of a jumbo 100 bp increase and investors have been cautious in the lead-up - especially after weak US and European data on Friday stoked growth fears.

Bonds rallied on Monday, with three-year Aussie government bond futures up 10 ticks to 96.850 and ten-year futures up 11 ticks to 96.630.