LONDON, Feb 21 (Reuters) - The dollar flattened on Wednesday as traders awaited minutes of the Federal Reserve's latest policy meeting for further clues on the central bank's rate outlook, while sterling shrugged off Britain's highest ever monthly budget surplus in January.

Data last week showed sticky U.S. inflation, prompting investors to push back bets the Fed would start cutting rates in March. Markets are now pricing in the first cut in June, compared with March at the start of the year.

Traders are now pricing in 95 basis points (bps) worth of easing by the Fed this year.

A slim majority of economists polled by Reuters expects the Fed to cut interest rates in June.

The minutes of the Fed's latest policy meeting due later in the day will provide further clarity on the outlook for U.S. rates.

Fiona Cincotta, Senior Financial Market Analyst at City Index, said investors will be closely watching the Fed's minutes for clues over the timing of the first rate cut.

"Since the FOMC (Federal Open Marekt Committee) meeting, Fed Jerome Powell and Fed policymakers have been pushing back on rate cut expectations, particularly given last week's hotter-than-expected inflation data.

"Currently, the market is expecting the Fed to start cutting rates in June. Hawkish minutes could see this pushed back further, which could lift the U.S. dollar."

The U.S. dollar index, measuring the currency against six peers, flattened at 104.05, after moving 0.25% lower on Tuesday on the back of a dip in global bond yields.


Elsewhere, sterling flattened at $1.2625 after figures showed Britain chalked up its highest ever monthly budget surplus in January ahead of finance minister Jeremy Hunt's annual budget in March.

"The ‘record’ surplus does not mean that the UK is firing on all cylinders and generating cash significantly faster than before. The surplus was lower than expected," said Kathleen Brooks, research director XTB.

"Economic growth is still likely to remain sluggish, so today’s data is unlikely to factor into the BOE’s decision on when to cut rates".

A potential tax cut next month may not lead to much extra consumption and should not move the dial for the BOE, she added.

Sterling was some distance away from Tuesday's one-week high of $1.2668, having retreated from that level after comments from Bank of England Governor Andrew Bailey.

Bailey said on Tuesday he was comfortable with investors betting on interest rate cuts this year, but pointed to signs that Britain's economy was picking up after falling into recession in late 2023.

The euro also flattened at $1.0808, ahead of an euro zone consumer confidence survey due later in the day.

Chris Turner, global head of markets at ING, said a mild improvement in the February numbers is expected.

"If there is a ray of light for the euro zone economy it may be that

wage growth

is not falling as quickly as inflation".

The Chinese yuan rebounded to a near three-week high, helped by some bounceback in its battered equity markets. It last stood at 7.1910 per dollar.

Its offshore counterpart rose to a three-week high, and was last up 0.05% at 7.1980 per dollar.

China on Tuesday announced its biggest cut in its benchmark mortgage rate to help prop up a struggling property market and the broader economy, though the move failed to draw much investor excitement as experts said more needs to be done.

(Reporting by Joice Alves in London, additional reporting by Rae Wee in Singapore; Editing by Bernadette Baum and Chizu Nomiyama)