LONDON, July 31 (Reuters) - The pound held steady versus the dollar on Wednesday but headed for its biggest one-day drop against the yen in nearly three months after the Bank of Japan (BOJ) raised interest rates in an unexpectedly hawkish move.
Investors were mainly focused on the Bank of England's interest rate decision on Thursday, with greater uncertainty than usual as policymakers have not spoken publicly for more than two months due to rules in the run-up to July 4's election.
The pound was trading steadily, at $1.2832 and was on course for a 1.5% monthly gain against the dollar.
Sterling options volatility, meanwhile, exploded to its highest in almost a year, reflecting the degree of trader nervousness ahead of the decision.
Bank of America strategists called the decision "super close", but said they believed the central bank would cut rates by 25 basis points.
"The question is: has the data since June changed the minds of the dovish members, who were close to cutting in June, enough. The lack of BoE-speak makes it difficult to gauge, but we suspect, for the dovish members, it doesn't," they said.
Implied overnight options volatility - a measure of demand for protection from big near-term price swings - hit 12.13%, the most since August last year and marking its biggest one-day rise since last June, according to LSEG data .
Market pricing around the outcome of the BoE meeting has swung wildly in the past few days, and by Wednesday morning was showing around a 63% chance of a cut .
The pound, however, dropped as much as 1.8% against the yen after the BOJ raised interest rates by more than expected and left the door open to more rate hikes, which sent the yen scorching higher against a range of currencies.
Later in the day, the Federal Reserve is expected to hold U.S. borrowing costs steady, but open the door to rate cuts as soon as September after recent data showed U.S. price pressures were easing broadly.
The euro edged slightly higher against the pound on Wednesday but looked set for a fifth consecutive month of declines. Euro/sterling was last up 0.17% at 84.385 pence.
Reporting by Amanda Cooper and Sruthi Shankar; Editing by Alun John and Alex Richardson
