LONDON, SYDNEY - Global stocks and government bonds rallied on Wednesday as good news on UK inflation added to a picture of cooling price pressures, although the data slammed the brakes on sterling's recent winning streak.

Headline British consumer price inflation fell to 7.9% year-on-year in June, against expectations for 8.2%, in the latest downside surprise for a major economy after more than 18 months of central banks cranking interest rates higher.

Later in the day, final euro zone inflation data for June confirmed that the annual rate of price increases in the region declined to 5.5%.

The trend signalled "those lagged effects of higher rates and tighter monetary policy are coming home to roost," said Eren Osman, managing director of wealth management at Arbuthnot Latham.

Sterling lost 0.8% to trade at $1.2961 as market bets that the Bank of England would raise interest rates as high as 6%, from the current 5%, faded out. Against the euro , the pound was 0.8% lower at 86.1 pence.

The BoE now had "the green light" for a 25 basis point (bps) rate rise next month, Pantheon Macroeconomics chief UK economist Samuel Tombs said, after markets had previously priced in a further 50-bps hike.

Sterling is still showing a 4% gain for the last three months, having boomed on speculation the U.S. Federal Reserve would end its rate hikes before the Bank of England does.

"Profit taking in sterling should not be a surprise," added Kenneth Broux, head of FX and rates corporate research at Societe Generale in London.

Signs of disinflation in the UK also generated optimism that global price increases may decelerate more rapidly than economists had forecast, pushing the MSCI index of world stocks 0.3% higher and towards its eighth consecutive day of gains - its longest rally since mid-2021.

UK indices outperformed. London's blue-chip FTSE 100 added 1.5% and the domestically focused FTSE 250 rose 2.7%, on track for its best daily performance since February 2.

In bond markets, the yield on the two-year UK gilt, which tracks interest rate expectations and moves inversely to the price of the government debt security, dropped 27 bps to 4.811%, set for its biggest fall since mid-March.

Germany's two-year bond yield dropped 6 bps to 3.189%. The 10-year yield, a benchmark for debt costs in the euro zone, fell 4 bps to 2.35%.

Euro zone bonds also benefited from comments by European Central Bank (ECB) governing council member Klaas Knot on Tuesday that rate hikes beyond next week's meeting were "by no means a certainty."

"This is perhaps the first time a known hawk within the ECB has backed the market’s view that we’re close to the end of the hiking cycle in Europe," said Chris Weston, head of research at broker Pepperstone in Melbourne.

Wall Street looked set for a quieter session, following U.S. consumer data on Tuesday that indicated the economy was sluggish but may have avoided a recession in the second quarter of this year.

Benchmark 10-year U.S. Treasuries yields were 3 basis points lower at 3.789%.

Futures trading indicated the S&P 500 and Nasdaq 100 share indices would hold steady at the market open.

The yen slipped to a one-week low of 139.43 per dollar and Japanese government bonds rallied following the Bank of Japan's governor sticking to his script that policy shifts are still some time away.

Asia's stock markets were mixed on Wednesday with economic growth concerns dragging on China's equities while shares rose in Japan and Australia.

(Editing by Sam Holmes, Bernadette Baum and Kim Coghill)