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The yen hovered near a 2-1/2-month high on Wednesday ahead of a Bank of Japan (BOJ) policy decision in which investors expect plans to taper its huge bond-buying program and hints as to when it will raise interest rates.

The Australian dollar slid to its weakest since May after core inflation surprised on the downside and lessened the risk of another rate hike. The yuan was little changed after the official purchasing managers' index (PMI) showed a third month of slowing manufacturing activity in China.

Wednesday looked set to be a busy day as investors will also get inflation figures from France and the wider euro zone bloc, alongside a policy decision from the U.S. Federal Reserve.

Spreading geopolitical violence is also keeping markets on edge.

The Aussie was last 0.63% lower at $0.6497, having fallen more than 0.8% to a roughly three-month low of $0.64825 after the consumer price index (CPI) data, as traders pared bets of a hike from the Reserve Bank of Australia (RBA).

That left the currency heading for a monthly loss of nearly 2%.

"The CPI has reported softer numbers than forecasted, particularly in the trimmed mean metric that the RBA closely monitors. This has significantly reduced the likelihood of the next meeting in August being live and revived the possibility for a rate cut before year-end," said Convera senior corporate FX dealer James Kniveton.

In China, manufacturing activity shrank in July for a third month, keeping alive expectations of further economic stimulus measures.

That did little to rattle the yuan, which was last more than 0.2% higher at 7.2325 per U.S. dollar, helped by China's central bank setting a strong midpoint around which it allows the currency to trade.

The main market event in the Asian trading session is the outcome of the latest BOJ policy meeting, with the yen last 0.17% higher at 152.49 per dollar.

It jumped 0.8% in the previous session after reports that the BOJ is considering raising short-term interest rates to around 0.25%.

The yen looked set to end July with a 5.5% gain, its best month since November 2022, helped by bouts of intervention and the unwinding of short-yen carry trades in anticipation of the BOJ decision.

"We believe that the BOJ likely will make significant headway on its exit from unorthodox policy at the July meeting by reducing bond purchases and hiking interest rates," said Gregor Hirt, global CIO for multi-assets at Allianz Global Investors.

BRACING FOR THE FED

The euro was last 0.06% higher at $1.0823 and was eyeing a 0.95% gain for July, helped by an easing dollar.

Data on Tuesday showed the euro zone's economy grew slightly more than expected in the three months to June, but the outlook for the remainder of the year was not quite so rosy.

Sterling eked out a 0.05% gain to last trade at $1.2844 and was eyeing a monthly gain of 1.5%. The dollar index dipped 0.05% to 104.39 and was on track to lose 1.3% for the month.

Traders were watching for the Fed decision - likely the next main catalyst for broad currency movement after the BOJ - where market expectations are for policymakers to lay the groundwork for a September rate cut.

Markets expect a September start to the Fed's easing cycle, with about 68 basis points worth of cuts priced in for the rest of the year.

"We expect (the Fed) to open the door to a first interest rate cut in September. In our view, such a move today could send the wrong signal to markets and could spook investors," said Barclays Private Bank chief market strategist Julien Lafargue.

"On the other hand, with markets already pricing in slightly more than 25bp worth of cuts in September, the Fed may find it hard to push back against these expectations."

Elsewhere, the New Zealand dollar ticked up 0.13% to $0.59105, though it was on track for a 3% drop in July.