SYDNEY: The Australian and New Zealand dollars surged on Wednesday after softer US inflation data overnight triggered a sell-off in the safe-haven US dollar amid hopes the Federal Reserve might not be too aggressive on interest rates in the months ahead.

The Aussie was changing hands at $0.6845, after surging 1.6% overnight to as much as $0.6893, its highest level in three months.

The kiwi was trading at $0.6456, having also jumped 1.2% to as high as $0.6513, its strongest level since early June.

It faces technical resistance at around 65 cents and has support at around 63 cents.

The next big test would be the Federal Reserve rate policy meeting later on Wednesday, and the two currencies could extend gains if the market interprets the Fed to be dovish.

Data showed overnight that US inflation moderated to a monthly gain of 0.1% in November, slowing from 0.4% the previous month. Economists polled by Reuters had forecast CPI gaining 0.3%.

The slowdown provides ammunition for the Fed to scale back the size of its interest rate increases, with investors lowering the peak for target Fed funds rate to 4.85% and pricing in more cuts by the end of 2023.

Australia, NZ dollars recover some overnight losses, await US CPI data

The safe-haven greenback fell 0.9% against a basket of major currencies to 103.57, the lowest since mid-June.

Tony Sycamore, market analyst at IG, said the next big level now in the Aussie’s sights is the 200-day moving average at $0.6905.

“A sustained break above here is needed to negate the view that the rally from the 0.6170 low is counter-trend and to indicate that a more robust recovery is under way.”

The yield on Australian 10-year government bonds edged lower, tracking US counterparts, to be at 3.354%, down 6 basis points from the previous close.

Three-year yield pulled back 8 bps to 3.052%.