Australian dollar finds support, inflation continues to cool

By Wayne Cole

SYDNEY, Feb 26 (Reuters) - The Australian dollar held its nerve on Wednesday as worries about new U.S. tariffs kept global markets on edge, while a reading on local inflation was too mixed to move the dial on expectations for future rate cuts.

Growth in Australia's monthly consumer price index held at an annual 2.5% in January, much as forecast, while the trimmed mean measure of core inflation rose a tick to 2.8%.

This monthly report is only a partial snapshot of the full CPI basket, focussed on goods rather than on services where most of the inflationary pulse is concentrated.

There were promising signs of softening in housing, which has been a major driver of inflation overall, with rents and new dwelling costs both cooling.

"The housing components showed a disinflationary impetus on top of what was seen most recently in Q4," said Tapas Strickland, head of market economics at NAB.

The result was consistent with core inflation slowing to 2.8% this quarter, from the fourth quarter's 3.2% and back in the RBA's 2-3% target band.

"The better inflation narrative and should see the RBA cut rates in May," Strickland added. "Thereafter much will depend on the outlook for activity and the labour market."

The full CPI report for the first quarter is due at the end of April, after the RBA's next meeting on April 1.

Markets imply little chance the Reserve Bank of Australia will cut the 4.10% cash rate again in April, but around a 70% probability of an easing in May. 0#AUDIRPR

The Aussie was trading a fraction lower at $0.6336 AUD=D3, having found support around $0.6320 overnight. It continued to shy away from the 100-day moving average at $0.6396, while major support is down at $0.6279.

The kiwi dollar held at $0.5720 NZD=D3, after stopping short of $0.5700 overnight. Resistance lies at $0.5772, with support at $0.5675.

Another gloomy reading on U.S. consumer confidence out on Tuesday added to worries about an economic slowdown and dragged Treasury yields sharply lower.

Local bonds tracked the move, with three-year futures YTCc1 rising 5 ticks to a two-week top at 96.240.

Yields on 10-year paper AU10YT=RR fell 4 basis points to 4.330%, but lagged the swing in Treasuries. Australian yields are now 4 basis points above the U.S., having been 17 basis point below just a couple of weeks ago.