Australian dlr retreats from 2025 highs, focus turns to CPI data, election outcome

SYDNEY, April 28 (Reuters) - The Australian and New Zealand dollars were on the back foot on Monday as investors await clarity in U.S.-China trade talks, while a domestic inflation report and a looming national election may offer some direction for the Aussie this week.

Australia will release quarterly inflation data on Wednesday which could seal the case for a rate cut in May. Analysts are looking for the CPI to rise 0.8% in the quarter, nudging the annual pace down to 2.3% from 2.4%.

The key trimmed mean measure of core inflation is seen rising 0.7% in the quarter, with annual inflation slowing to 2.9% from 3.2%, back in the RBA's 2-3% target band for the first time since late 2021.

Luci Ellis, chief economist at Westpac, said the turmoil abroad means the RBA will cut rates in May even though the inflation data could be a little disappointing.

"Now, uncertainty has escalated to a whole new level and the risks have completely flipped. Even though we do not expect the U.S. administration to implement tariffs at the rates originally announced, some damage has already been done," said Ellis.

Indeed, swaps suggest a quarter-point move has been fully priced in, with a total of five rate cuts expected this year. 0#AUDIRPR

That's partly why the Aussie AUD=D3 is struggling to extend its rally and was last down 0.2% to $0.6382. It has climbed for three straight weeks to $0.6439, the highest since early December, but resistance now sits at 64 cents.

The kiwi dollar NZD=D3 also eased 0.2% to $0.5950, having gained 0.4% last week to a five-month peak of $0.6029. Resistance is around 60 cents.

While U.S. President Donald Trump has claimed progress is being made on trade with China, Beijing denied any talks were taking place. However, the Trump administration signalled openness to reducing tariffs and China exempted some imports from its 125% levies.

The campaign for the national election in Australia is entering its final leg before the polling day on May 3, with Prime Minister Anthony Albanese ahead in the recent polls as the government doles out more cost of living relief to struggling households.

The generous election promises prompted analysts at S&P Global Ratings to warn that Australia's AAA sovereign credit rating may be at risk, although the country's debt issuance is still low compared with international peers.

"The budget is already regressing to moderate deficits as public spending hits post-war highs, global trade tensions intensify, and growth slows," they said in a note on Monday.

"How the elected government funds its campaign pledges and rising spending will be crucial for maintaining the rating."