LONDON - Sterling steadied on Wednesday against the dollar and euro, after hitting a two-week low against the firmer euro, as data showed British inflation climbed to its highest rate in 40 years, but only slightly above forecast.

The inflation data bolstered bets that the Bank of England will opt for a 50-basis point rate hike next month, but moves for sterling were limited as that hike scale had been priced in, traders said.

Sterling edged 0.1% lower against the euro at 85.27 pence at 0820 GMT, after slipping to its lowest level againt the single currency since July 7 in earlier trade.

Sterling was flat at $1.2000 against the U.S. dollar , after climbing to an 11-day high on Tuesday.

Governor Andrew Bailey said the scale of increase in borrowing costs - unseen in Britain in a quarter of a century - was on the table but not "locked in".

Annual consumer price inflation rose in June to 9.4%, its highest level since February 1982, up from May's 9.1% and above the 9.3% consensus in a Reuters poll of economists.

"UK CPI came in only slightly above consensus... Today's release will not be the key factor to tilt the August BoE policy decision in one direction or the other," said Francesco Pesole, FX Strategist at ING.

Sterling will likely remain a function of dollar moves, while the euro may stay supported against sterling unless Italian politics drags the euro back lower, he added.

Hugh Gimber, global market strategist at J.P. Morgan Asset Management said "taken in aggregate with yesterday's wage growth data, it appears clear that the bar has been met for the Bank to increase interest rates by 0.5% in early August".

On Tuesday, data showed Britain's unemployment rate holding at 3.8% in the three months to May, while growth in regular pay picked up slightly to 4.3%, bolstering bets for a higher BOE interest rate increase next month.

The central bank is expected to hike rates for the sixth time since December.

(Reporting by Joice Alves; Editing by Rashmi Aich)