Australia, NZ dollars climb as US-EU trade deal bolsters risk sentiment

By Stella Qiu

SYDNEY, July 28 (Reuters) - The Australian and New Zealand dollars climbed on Monday, as relief over a U.S. trade deal with the European Union underpinned risk sentiment at the start of a pivotal week.

The two currencies - often traded as proxies for global risk - have been grinding higher in recent weeks, tracking the buoyancy in equities. Investors now turn their attention to the Stockholm meeting between senior U.S. and Chinese negotiators on Monday, aimed at extending the tariff truce between the world's two biggest economies.

Australia's all-important quarterly inflation reading, due on Wednesday, will make or break the case for a rate cut next month. The Federal Reserve's policy decision on Wednesday, Washington's August 1 deadline for trade negotiations and a U.S. jobs report on Friday will also influence market sentiment.

The Aussie AUD=D3 rose 0.2% to $0.6575, having finished last week with a gain of 0.9%. It is perched not far from a nearly nine-month top of $0.6625, with its upward trend still intact.

The kiwi dollar NZD=D3 edged up 0.1% to $0.6018, after rallying 0.9% last week to as high as $0.6059. It is, however, still some distance away from its nine-month peak of $0.6120, with support at 60 cents.

Currency market reactions to the U.S.-EU deal, which includes a 15% tariff on EU goods, were muted, with the euro EUR=EBS inching up 0.1%. European stock futures suggested a near 1% rise in shares when markets open.

Kristina Clifton, a senior currency strategist at the Commonwealth Bank of Australia, expects the Aussie to extend its gains towards resistance at 67 cents if U.S. trade developments are perceived to be positive for risk sentiment.

"The critical Australian Q2 25 CPI can also inject some intraday volatility into AUD/USD."

The Reserve Bank of Australia has been waiting for the second quarter CPI report to confirm that the inflation beast has been tamed. Forecasts are centred on a 0.7% quarterly rise in the policy relevant trimmed mean measure, a tad higher than what the central bank was expecting.

A major upside surprise could deal a blow to hopes for an August rate cut. Markets are again pricing in a near certain chance that the RBA will lower rates by a quarter point to 3.6% on August 19, having been caught totally wrongfooted just this month.

"A 0.8% q/q would present a challenge for the Board, given its desire to wait for the Q2 CPI, along with other data and updated staff forecasts," ANZ analysts said.

"That's not our expectation, however," ANZ said, with a forecast of a 0.6% rise in the trimmed mean measure.