* Yen steady, subdued reaction to Japan Q2 GDP contraction
* Euro inches lower but holds above overnight lows
* Sterling eyes BOE economic update (Updates prices, adds comments)
By Masayuki Kitano and Ian Chua
SINGAPORE/SYDNEY, Aug 13 (Reuters) - The yen held steady versus the dollar on Wednesday, showing limited reaction to the widely expected contraction in Japan's economy in April-June, while the euro hovered above the previous day's lows.
Japan's economy shrank an annualised 6.8 percent in the second quarter, suffering its biggest contraction since the devastating March 2011 earthquake as a sales tax hike took a heavy toll on household spending.
The annualised contraction in gross domestic product, however, was slightly less than a median market forecast for a 7.1 percent drop.
The yen showed limited reaction to the data, which was broadly in line with market expectations. The dollar was flat on the day near 102.30 yen, having traded between 103.15 yen and 101.51 yen over the past couple of weeks.
"Overall the contents weren't enough to increase the possibility of additional BOJ monetary easing or to lower the economic outlook for July-September onwards," said Shinichiro Kadota, chief Japan FX strategist at Barclays Bank in Tokyo.
The dollar's near-term outlook against the yen will likely hinge on factors such as U.S. economic data, as well as any further news about the asset allocation plans of Japan's Government Pension Investment Fund (GPIF), Kadota added.
Bank of Japan Governor Haruhiko Kuroda had sounded upbeat about the economic outlook last week after the BOJ kept its policy unchanged, underscoring the central bank's conviction that no fresh near-term stimulus is needed to shake off the effects of a sales tax hike in April.
The yen also held steady versus the euro. The euro stood near 136.69 yen, staying above an 8-1/2 month low of 135.73 yen touched last week.
The euro eased 0.1 percent against the dollar to about $1.3362. The single currency had dipped to $1.3336 on Tuesday, coming within a whisker of a nine-month trough of $1.3333 set last week.
The euro seems likely to stay on a downward path given the recent weakness in euro zone economic data and the potential for further monetary easing by the European Central Bank, said Sim Moh Siong, FX strategist for Bank of Singapore.
"I think the trajectory (for the euro) is still downwards. It's just that in the near-term, there's a bit of caution in terms of positioning," Sim said, referring to a build-up in bearish bets against the euro.
Euro bears had emerged on Tuesday after German analyst and investor morale fell sharply as the crisis in Ukraine took a toll.
"The German ZEW expectations survey disappointed yet again after seven consecutive months of below-consensus prints. The miss was the largest this year and continues to suggest further loss of momentum," analysts at JPMorgan wrote in a note to clients.
Sterling eased 0.1 percent to $1.6802 as investors awaited an update of the Bank of England's economic forecasts at 0930 GMT, with markets keen to see if there will be any hint of whether interest rates will rise this year.
A more robust recovery and a sharp drop in unemployment have markets betting on a rate rise either late this year or early in 2015. (Editing by Richard Borsuk)