* Underlying inflation up 0.9 pct q/q, biggest rise since mid-2011
* Implied chance of RBA rate cut shrinks sharply to 1-in-5
* Aussie up more than 0.5 pct vs major currencies
By Gyles Beckford and Cecile Lefort
SYDNEY/WELLINGTON, Jan 22 (Reuters) - The Australian dollar surged three-quarters of a U.S. cent on Wednesday after an unexpectedly sharp rise in inflation forced investors to greatly scale back wagers on another cut in interest rates.
The Aussie
It was last at $0.8855 with resistance seen at $0.8883, the 38.2 percent retracement of the $0.8756-$0.9087 move, and then $0.8900.
The data showed Australia's main measures of underlying inflation climbed 0.9 percent in the fourth quarter, well above forecasts and the largest rise in over two years.
Annual underlying inflation of 2.6 percent was also the highest since 2011, leaving inflation in the upper half of the Reserve Bank of Australia's long-term target of 2 to 3 percent.
"The latest result is likely to see the Reserve Bank shift from debating the merits of another rate cut to a more neutral stance," said Savanth Sebastian, an economist at CommSec. "We believe that interest rates are likely to remain on hold over the next six months."
Interbank futures
Swap rates
Yields on two-year government debt
Australian government bond futures also skidded from recent multimonth highs with the three-year bond contract
The Aussie leapt against the euro, yen and pound. It made the biggest jump on its kiwi neighbour, having been pinned near eight-year lows on diverging economic and interest rate outlooks for Australia and New Zealand.
The Aussie rose more than 0.6 percent to a high of NZ$1.0658
Against the greenback, the kiwi
"Immediate resistance lies ahead of the $0.8350 level, with shorter-term exporter appetite eyeing any retreat to a window in front of $0.8275," said BNZ strategist Kimberley Martin.
New Zealand had itself reported a surprisingly high reading of domestic inflation on Tuesday that fanned speculation the Reserve Bank of New Zealand might hike interest rates at its policy review on Jan. 30.
New Zealand government bonds
(Editing by Chris Gallagher)
((Cecile.Lefort@thomsonreuters.com)(+61 2 9373-1234)(Reuters Messaging: cecile.lefort.thomsonreuters@reuters.net))
Keywords: MARKETS AUSTRALIA/FOREX