By Jamie McGeever
LONDON (Reuters) - European shares eased back from multi-year highs on Wednesday and the euro licked its wounds after slumping to a five-week low as the focus shifted to an economic outlook from the Bank of England for clues on when UK interest rates will rise.
News on Tuesday that the Bundesbank is ready to support further easing steps from the European Central Bank next month if they are warranted ensured a limited rebound for the euro and an equally shallow dip in stocks from these peaks.
Sources also told Reuters that a rate cut next month is "more or less a done deal".
After the sizeable ECB-driven moves across equities, bonds and currencies on Tuesday, the focus switched to the BoE on Wednesday.
Investors will look to British employment data, the central bank's quarterly inflation report and comments from governor Mark Carney for signs on the timing of an expected rise in interest rates, which some analysts now speculate could come in late 2014 rather than early next year.
This would likely mean the BoE being the first G4 central bank to raise rates from the post-recession record lows of virtually zero across Britain, the United States, euro zone and Japan.
"Governor Carney will try to soothe the market's fears of an overheating housing market," SocGen analysts said in a note to clients.
"He is not yet ready to tighten policy," they cautioned.
Still, the contrasting policy bias of the ECB and BoE pushed the euro to a 16-month low against sterling on Wednesday of 81.23 pence.
The euro regained a footing against the dollar, however, ticking up 0.1 percent to $1.3720. On Tuesday it fell below $1.37, marking a near 3-cent fall in less than a week.
Britain's FTSE 100 index of leading shares (.FTSE) was down 0.2 percent at 6859 points.
The FTSEurofirst 300 index of leading European shares was down 0.1 percent at 1367 points (.FTEU3), hovering close to Tuesday's six-year high. The FTSEurofirst 300 has risen some 7 percent from lows in March.
Germany's DAX (.GDAXI) was flat on the day at 9752 points. Earlier on Wednesday it had climbed 0.2 percent to 9,771.40 points, back within reach of a record high of 9,794 points reached in January.
ITALIAN BOND STRENGTH
Asian shares rose to their highest level in more than a month on Wednesday after the S&P 500 closed at a record high overnight.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> added 0.8 percent, after earlier hitting its highest level since April 10.
Hong Kong shares (.HSI) were up more than 1 percent as investors snapped up property and banking stocks after China's central bank urged mainland banks to speed up the granting of home loans.
Japan's Nikkei (.N225) bucked the trend, slipping about 0.1 percent and moving away from the previous session's 1-1/2-week high as investors took profits.
In bond markets, Italian yields held near record lows before the sale of a longer-dated bond in Rome that is expected to fare well, after Spain's first inflation-linked bond issue on Tuesday drew bids of more than 20 billion euros.
Plans for the new Italian 15-year bond issue, to be sold via syndication, were unveiled late on Tuesday.
"The key theme here is that demand for peripheral paper is very strong and the Spanish linker showed 70 percent of the issue was picked up by foreign investors and the Italian syndication should show a similar trend," said Commerzbank strategist Michael Leister.
Italian 10-year yields were steady at 2.94 percent, not far from the record low 2.90 percent hit last week, and Spanish 10-year yields dipped 1 basis point at 2.89 percent with Irish equivalents were also slightly lower, both heading back towards record lows.
In commodities trading, U.S. crude added about 0.4 percent to $102.04 a barrel, extending Tuesday's two-week highs hit on expectations that weekly inventory reports will show record-low stockpiles.
Spot gold rose half of 1 percent to $1,300 an ounce.
(Additional reporting by Emelia Sithole-Matarise in London and Lisa Twaronite in Tokyo; Editing by Alison Williams; To read Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting;
for the MacroScope Blog click on http://blogs.reuters.com/macroscope;
for Hedge Fund Blog Hub click on http://blogs.reuters.com/hedgehub)