Euro awaits ECB, sterling hits 2-week high on UK election day

LONDON: The euro steadied near six-month highs on Thursday ahead of a European Central Bank policy announcement while sterling set a two-week high as markets priced in a victory for Britain's Conservative Party in national elections.

The euro has risen 10 percent against the dollar in the past five months, partly due to the greenback's weakness but also on the view that rising inflation would prompt the ECB to raise interest rates in early 2018.

But reports on Wednesday that the ECB would cut its inflation forecasts have dampened expectations of the bank's language veering towards a pullback of its stimulus programme, also known as quantitative easing (QE), later this year.

The ECB is widely expected to keep policy unchanged on Thursday, including its 2.3 trillion euro ($2.59 trillion) bond-buying programme.

Valentin Marinov, head of FX strategy at Credit Agricole said that a downward revision to the ECB's core inflation path could dash hopes of a QE taper announcement as soon as September, adding he expected the ECB to deliver a relatively dovish message compared with expectations.

"On the whole, a return of the ECB's cautious rhetoric on the euro, plus a revision of the inflation projections and the dovish language that Draghi will likely use even when he's conveying a fairly constructive assessment of the improving euro zone outlook could weigh on the single currency," he said.

By 0806 GMT, the euro was up less than 0.1 percent at $1.1259.

Sterling traded at $1.2969, staying near a peak of $1.2978 hit in morning European trade, its highest level since May 25.

Opinion polls on Wednesday showed that Prime Minister Theresa May is on course to increase her majority in parliament in Thursday's election, suggesting her gamble to call the vote to strengthen her position in Brexit negotiations will pay off.

"Markets appear to be pricing in a Conservative Party majority victory," said Jasslyn Yeo, market strategist in Singapore for J.P. Morgan Asset Management.

If the Conservative Party gains a decisive majority of more than 50 seats, that would probably be seen as a positive outcome for sterling, Yeo said.

"However, we still see much uncertainty surrounding the UK election, where a higher turnout vote of young people could potentially turn the tables on investors," she added.

Investors will closely monitor U.S. Senate testimony by former FBI Director James Comey later on Thursday, worried his testimony could dampen already flagging momentum for President Trump's agenda of rolling back regulation and overhauling the tax code.

In written testimony released on Wednesday, Comey - who was abruptly fired by Trump in May - said that the president asked him to drop an investigation of former National Security Adviser Michael Flynn as part of a probe into Russia's alleged meddling in the 2016 presidential election.

The dollar slipped 0.3 percent to 109.72 yen, edging back in the direction of Wednesday's low of 109.115 yen, its lowest level in about seven weeks.

Traders said the yen edged higher after Bloomberg reported on Thursday, citing unnamed sources, that the Bank of Japan was re-calibrating its communications to acknowledge that it is thinking about how to handle a future exit from monetary stimulus.