By Wayne Cole

SYDNEY, May 28 (Reuters) - The Australian dollar took a fresh knock on Thursday as soft consumer spending data added to the case against a further rise in domestic interest rates, just as markets were ramping up wagers on New Zealand rate hikes.

The net result was a bruising retreat for the Aussie against the kiwi as it struck a six-week low of NZ$1.2072 AUDNZD=R, having shed 1.7% in just two sessions.

Risk sentiment was also bruised by fresh conflict in the Gulf, leaving the Aussie down 0.4% at $0.7113 AUD=D3 and nearer major chart support at $07080.

The kiwi held at $0.5884 NZD=D3, after rallying 1.2% on Wednesday. Its next target is $0.5991.

Australian data showed household spending slid a surprisingly large 1.1% in April as consumers cut back on travel, clothing, and food as the conflict in the Middle East hit confidence.

The report overshadowed data showing business investment had surged 6.5% in the first quarter amid a rush for data equipment, though most of that is imported.

For the Reserve Bank of Australia, the retreat in consumer spending will suggest higher borrowing costs and spiking fuel prices are working to curb demand and could help restrain inflation over time.

"The data are likely to give the RBA pause for thought about tightening policy further," said Abhijit Surya, a senior APAC economist at Capital Economics.

"It seems all but certain that the Bank will leave rates on hold at 4.35% in June, and there are growing risks to our forecast that it will deliver a final 25bp hike in August."

Markets now imply almost no chance of a June move, while the probability of an August hike has more than halved to 40%. 0#AUDIRPR

At the same time, a hawkish policy outlook from the Reserve Bank of New Zealand saw markets price in a 75% chance it would hike the 2.25% cash rate in July and take it to 3.0% by the end of the year. 0#NZDIRPR

"The combination of paring in RBA rate hike expectations and a 'hawkish hold' from the RBNZ, offers a compelling case to call time on the 9-month uptrend in AUD/NZD to 13-year highs," argued Ray Attrill, head of FX strategy at NAB.

"Our prevailing forecasts for AUD/NZD ending Q2 near $1.20 and subsequently dropping by on average two cents per quarter, are reaffirmed."