By Stefano Rebaudo
(Reuters) - Sterling fell against a strengthening dollar after shrugging off British data on Wednesday as investors await the outcome of the Federal Reserve policy meeting.
The pound hit a fresh 8-1/2-year high versus the yen as the Bank of Japan (BOJ) decision to exit its negative interest rates policy left higher-yielding currencies such as the pound appealing versus Japanese assets.
Sterling was down 0.2% versus the dollar at $1.2696, while the euro was flat at 85.39 pence.
Against the yen, sterling hit a fresh high of 192.84 and was last up 0.7% at 192.61.
British inflation slowed in February, keeping the Bank of England (BoE) on track to start cutting interest rates in the months ahead. British finance minister Jeremy Hunt said the figures would "open the door" for a BoE monetary easing.
Markets slightly increased their bets on BoE monetary easing, pricing a roughly 63% chance of a first move in June from 58% before the data.
Analysts expect the Federal Reserve to keep rates unchanged after its meeting on Wednesday, and they will focus on signals about the timing and extent of any easing this year.
They also forecast that the BoE will keep investors guessing when it will likely start cutting rates.
"We expect no changes to the guidance. The minutes should reflect the continued need for more confidence but smaller tail risks," said Ruben Segura-Cayuela, European economist at BofA.
"The emphasis from here is likely to still be on sticky services inflation, ongoing and upcoming wage negotiations, and the pass-through of the upcoming increase in the national living wage," he added.
Investors recently drove the value of the existing net long position, which assumes the pound will rise against the dollar, to its largest on record, at $5.632 billion.
"We have argued there is little justification for this (pound) performance (in 2024) and believe these stretched levels of positioning are increasingly vulnerable to any potential dovish shift by the BoE," said Dominic Bunning, head of European forex research at HSBC (LON:HSBA).
Bunning flagged that the pound has been the best-performing G10 currency relative to the greenback year-to-date.