SYDNEY: The New Zealand dollar jumped on Tuesday, buoyed by rising expectations that the its central bank will have to hike more aggressively and improved investor confidence, while the Aussie also reversed earlier losses.

Headlines that the Bank of England was likely to delay the sale of billions of pounds in government bonds in a bid to encourage greater stability in gilt markets boosted risk sentiment.

Sterling extended gains against the dollar.

The kiwi dollar rose 1.2% to $0.5703, having also jumped 1.3% overnight and pulling further away from the recent 2-1/2 year trough of $0.5512.

The Aussie had less luck, although it did reverse earlier losses to be up 0.6% to $0.6327 late in Asia.

It gained 1.5% overnight.

Australia, NZ dollars catch a breather after plunge as bearish pressure builds

Overnight, Britain’s finance minister Jeremy Hunt scrapped Prime Minister Liz Truss’s economic plan and scaled back her vast energy subsidy on Monday.

“FX markets are likely to remain driven by the Fed’s repricing, lingering UK risks and geopolitics, keeping FX volatility elevated,” said analysts at Barclays.

Official data on Tuesday showed annual inflation in the New Zealand ran at 7.2% in the third quarter, far outpacing expectations in a Reuters poll for a 6.6% annual rise. On a quarter-on-quarter basis, the consumer price index (CPI) rose 2.2%.

The blockbuster figures have prompted markets to price in a near 70% probability that the Reserve Bank of New Zealand would hike by 75 basis points at its policy meeting next month, with rates now seen peaking around 5.3%.

Two-year swap rates jumped to 5.13%, suggesting that markets have priced in another 25bp hike.

The likely hawkishness from RBNZ sent traders to buy the kiwi against the Aussie, which fell 0.6% to NZ$1.1080, the lowest level in more than a month.

The Reserve Bank of Australia on Tuesday also outlined the reasons behind its surprise move to go with a smaller 25 basis point hike, citing domestic and global uncertainties.

However, inflation ran at a 21-year high of 6.1% in the June quarter and is thought to have accelerated to 6.9% in the September quarter, which would pile pressure on the RBA to follow its global peers.