The euro struck a two-month high against the yen and stayed within reach of an 11-week high against the dollar on Wednesday, as markets stayed in risk-on mode on robust European bank earnings and solid economic data.

The Australian dollar bucked the trend, after weaker-than-forecast Australian inflation dented rate hike expectations.

Risk sentiment had been boosted on Tuesday as European shares hit a five-week closing high. Two of Europe's top banks, UBS AG (UBSN.VX)(UBS.N) and Deutsche Bank AG (DBKGn.DE)(DB.N), posted results that reassured investors following last week's regulatory stress tests.

A rise in Germany's GfK consumer sentiment indicator on Wednesday to its highest level since November has also boosted hopes that the economic outlook in Europe is improving.

Asian equity markets tracked the positive tone, as Japan's Nikkei 225 Index .N225 and China's Shanghai Stock Exchange .SSEC both jumped more than 2 percent on Wednesday.

Clearly there's a risk-on situation as the market is starting to believe there's a European recovery in place, but there is thin liquidity behind it, said Neil Mellor, currency strategist at Bank of New York Mellon.

At 0724 GMT, the euro was trading up around 0.3 percent versus the yen EURJPY=R at 114.50, close to a two-month high hit in early European dealing at 114.74 on trading platform EBS.

Technical analysts said the picture was becoming bullish, as euro/yen continued to make gains within its Ichimoku cloud. The top of the cloud was seen as key resistance at 117.86.

The euro stayed within touching distance of an 11-week high against the dollar EUR= at $1.3045 hit the previous day. Traders said an option barrier at $1.3050 would need to be taken out for a move towards Fibonacci resistance at $1.3125, which is a 38.2 percent retracement of the December-June move.

Large option expiries were reported by traders at $1.3000 and $1.2850, potentially slowing the euro's gains on the day.

Focus for the morning was the ECB's three-month liquidity operation, with the result due around 0920 GMT.

The tenders have shown there are a still a large number of European banks which are clearly hooked on ECB funding, which isn't a good situation, said BNYM's Mellor.

Results of a Portuguese bond auction were also keenly awaited, set for release around 0930 GMT.

AUSSIE SLIDES ON CPI DATA

The Australian dollar slid 0.7 percent to $0.8949 AUD=D4, having dropped from a 11-week high of $0.9069 reached the previous day.

Australian consumer prices rose much less than expected last quarter and core inflation slowed to its lowest in more than three years, ruling out the need for a rate rise next week and possibly the rest of the year.

The Aussie has given back some of its recent gains as CPI data prompted investors to push back expectations for higher rates, said Ayako Sera, a market strategist at Sumitomo Trust & Banking.

But the Aussie is likely to keep drawing support from Australian interest rates, which are still the highest among industrialised countries.

The dollar index .DXY was down 0.2 percent at at 82.011, staying close to a 12-week low hit on Tuesday at 81.824.

(Additional reporting by Rika Otsuka; Editing by Susan Fenton)

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