[1/3] Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 22, 2023. REUTERS/Brendan McDermid

NEW YORK/LONDON, June 13 (Reuters) - Global shares rallied and the dollar eased on Tuesday after U.S. inflation data showed consumer prices barely rose in May, increasing expectations the Federal Reserve will pause hiking interest rates when it concludes a two-day meeting on Wednesday.

The annual increase in the consumer price index was the smallest in more than two years, though underlying price pressures are still strong and suggest inflation will not easily cool - a scenario that keeps the door open to a future Fed hike.

The strength of the economy will dictate whether the Fed hikes again later this year, said Joseph LaVorgna, chief U.S. economist at SMBC Nikko Securities in New York.

"I'm not sure it's going to be driven by inflation per se, because again, the core is going to stay sticky for a while," he said. "It's going to be because either broad GDP trends re-accelerate or the labor market doesn't show any signs of loosening."

Expectations the Fed will keep its target rate unchanged on Wednesday in a range of 5%-5.25% rose to 97.6%, while the probability of a rate hike at the Fed's policy meeting ending on July 26 rose to 60.6%, according to CME Group's FedWatch Tool.

On Wall Street, the S&P 500 (.SPX) and Nasdaq (.IXIC) rose to fresh one-year highs, helping lift MSCI's U.S.-centric gauge of stocks across the globe (.MIWD00000PUS) 0.76%.

In Europe, the pan-regional STOXX 600 index (.STOXX) gained 0.59%, while the Dow Jones Industrial Average (.DJI) rose 0.36%, the S&P 500 (.SPX) 0.53% and the Nasdaq Composite (.IXIC) 0.52%.

The dollar index , which measures the U.S. currency against six peers, eased 0.367% as the interest rate differential fell ahead of a likely rate hike by the European Central Bank on Thursday and possibly the Bank of England next week. The Bank of Japan is expected to maintain its ultra-loose policy after it meets on Friday.

"I can see where sterling continues to do well against the dollar, I can also see where the euro continues to do well against the dollar from here, but I wouldn't stress so much the central bank situation as I would China," said Thierry Wizman, Macquarie’s global FX & interest rates strategist.

"China is the key if we start to see growth and stimulus out of China, the dollar will weaken again just like it was weakening in March and April when everyone was convinced China would see strong growth."

The euro gained 0.41% to $1.0801, sterling rose 0.73% to $1.2602, and the yen weakened 0.17%.

The yield on 10-year Treasury notes rose 1.1 basis points to 3.776%.

Oil prices rose on apparent bargain hunting, recovering some from the previous day's plunge, but gains were limited as investors remain cautious ahead of key policy decisions by the ECB and other central banks and on weak economic data from China.

U.S. crude rose 3.92% to $69.75 per barrel and Brent was at $74.57, up 3.8% on the day.

Meanwhile, data on Tuesday that showed a rapid pick-up in UK wage growth in the three months to April could complicate matters for the Bank of England, which is already grappling with inflation that is more than four times its target of 2%.

"The key takeaway here is, not only was unemployment not ticking higher, we've got strong jobs growth and also wage growth is just extremely high right now and that's going to be making the Bank of England feel very uncomfortable," City Index senior markets analyst Fiona Cincotta said.

Money markets show traders now anticipate a peak in UK rates at around 5.7% by December, up from a terminal rate of 4.85% by November a month ago.

Additional reporting by Amanda Cooper and Farouq Suleiman in London and by Julie Zhu in Hong Kong; Editing by Conor Humphries, Alex Richardson and Sharon Singleton

Our Standards: The Thomson Reuters Trust Principles.

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