FOREX-Euro edges higher on ECB day, all eyes on inflation comments

* Euro edges 0.2% higher ahead of ECB
* Sterling stabilises as USD rally cools off
* ECB meeting could flag more policy easing
* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E

By Sujata Rao
LONDON, Sept 10 (Reuters) - The euro edged higher on
Thursday against a weaker dollar but gains were capped by the
possibility that the European Central Bank could flag more
policy easing if it deemed economic recovery and inflation are
at risk from currency appreciation.
Most other currencies too ground higher as the dollar
resumed its downtrend following a U.S. technology shares bounce
that suggested a improvement in risk appetite. The greenback had
hit a one-month high against a currency basket on fears world
markets were headed for another downturn =USD .
Attention however centered on the euro and the ECB's
governing council meeting later on Thursday. The bank is all but
certain to keep policy unchanged but President Christine
Lagarde's comments on the euro's recent rise to two-year highs
will be closely monitored.
It has risen almost 6% against the dollar from June lows.
"A dovish emphasis seems likely – perhaps even talking up
rate cuts – to attempt to stem the rise of the euro and set the
scene for potential easing later this year," analysts at Citi
told clients.
Such expectations grew after data showed euro area consumer
prices turned lower in August for the first time since 2016.

Lagarde may also comment on future inflation strategy after
the U.S. Federal Reserve's recent policy switch that implied
keeping interest rates lower for longer.
The euro EUR=D3 bought $1.1829, up 0.2% on day. It had
received a boost on Wednesday after Bloomberg News reported that
ECB officials are growing more confident in the bloc's economic
outlook.
But many reckon the ECB will struggle to tamp down euro
strength, given greater investor confidence in the bloc after
the creation of a joint recovery fund and a robust response to
the pandemic.
Moreover, euro interbank rates have hit record lows this
week, reflecting abundant liquidity in the financial system
which banks are unable to adequately deploy.
Petr Karpata at ING Bank said the Bloomberg report suggested
the ECB sees less need for imminent action, and predicted
Lagarde would restrict herself to saying the exchange rate was
being closely monitored.
"All this suggests a modest upside risk to euro/dollar with
the pair moving to or above the 1.1850 level today," he said.
Elsewhere, dollar weakness allowed sterling GBP=D3 to
stabilise at $1.30, having dipped to a six-week low of $1.2839
on Wednesday after Britain unveiled draft legislation which
raises risks of it exiting the EU single market in four months
time with no trade agreements in place.
The pound slipped to 90.90 pence per euro however, close to
a six-week low. EURGBP=D3
The Australian dollar AUD=D3 fell to $0.7268 amid concerns
abound worsening diplomatic ties with China over the treatment
of the two countries' journalists. Investors are also monitoring
an outbreak of coronavirus infections in the state of Victoria.