(Updates headline and prices throughout, adds fresh analyst

quotes)

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ECB expected to hold rates on Thursday, BoE cut fully

priced

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Yen weakens as BOJ expected to raise rates on Friday

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Dollar index gains, euro edges lower

By Chibuike Oguh and Joice Alves

NEW YORK/LONDON, Dec 17 (Reuters) - Sterling fell on

Wednesday after an unexpected drop in UK inflation all but

guaranteed the Bank of England would cut interest rates, while

the dollar rose as markets awaited central bank decisions and

weighed commentary from Federal Reserve officials.

Sterling was set for the biggest one-day drop as

interest rate futures priced in a near 100% chance of a

quarter-point rate cut from the BoE on Thursday.

Data had shown that British inflation fell much more sharply

than forecast in November to 3.2%, its lowest since March, from

3.6% in October.

"The November CPI print surprised to the downside this

morning. As a result, GBP is the worst performing G10 currency

this morning after having outperformed yesterday," Goldman Sachs

analysts led by Teresa Alves wrote in an investor note.

Sterling was down 0.53% to $1.3350, easing away from the

two-month high it touched on Tuesday after data showed Britain's

unemployment rate hit its highest since the start of 2021.

"For Sterling, we have noted that our view of relative

underperformance is predicated on softer data, including on the

inflation front, rather than a 'dovish' reaction function in

itself. Today's data goes in that direction and focus will now

turn to the BoE meeting tomorrow," the Goldman Sachs analysts

said.

CENTRAL BANK MEETINGS IN FOCUS

Federal Reserve Governor Christopher Waller said on

Wednesday the U.S. central bank still has room to cut interest

rates amid rising job market weakness.

Waller's comments were his first remarks after the Fed cut rates

as expected last week but signalled borrowing costs are unlikely

to drop further in the near term, projecting just one more rate

cut in 2026. The U.S. consumer price index data is due on

Thursday, following softer employment data earlier this week.

"We saw the dollar weaken after the jobs data yesterday, but

the move was reversed fairly quickly because I think the market

seems to be kind of doubtful about the possibility of a Fed cut

in January," said Vassili Serebriakov, FX strategist at UBS in

New York.

The dollar index, which measures the U.S. currency

against six others, rose 0.16% to 98.37, still not far from the

lowest level since early October hit on Tuesday. The index is

down about 9.5% this year, on track for its steepest annual

decline since 2017.

Markets are awaiting a host of central bank policy decisions due

this week, including the BoE and European Central Bank on

Thursday, as well as the Bank of Japan, which is expected to

raise interest rates on Friday to a three-decade high.

The dollar strengthened 0.5% to 155.46 against the

yen ahead of the BOJ meeting, where the focus will be on the

forward guidance and where the policy rate is headed in 2026.

Europe's largest economy continues to struggle to grow, with a

survey showing that German business morale unexpectedly fell in

December.

The euro was flat at $1.17415, after touching a

12-week high on Tuesday ahead of the ECB policy decision, where

the central bank is expected to hold rates steady.

"I think of all these central bank meetings that are coming

up, the ECB is not likely to be very impactful, but the Bank of

Japan is probably the most important and where most uncertainty

lies," Serebriakov said.

In cryptocurrencies, bitcoin gained 1.94% to

$89,487.47. Ethereum rose 0.93% to $2,979.05.