Euro, sterling buoyant before central bank meetings

By Marc Jones

LONDON (Reuters) - Expectations the European Central Bank will keep its policy powder dry for another month at least kept the euro near a two-month high on Thursday, as soothing talk from the head of the Federal Reserve lifted shares and bonds.

The ECB meets in Brussels later and though euro zone inflation remains well below its comfort zone, signs the economy is picking up and still-falling government borrowing costs mean the bank is likely to hold off cutting interest rates again.

The euro edged up 0.1 percent to $1.3920 in early European trading, hovering near the two-month peak of $1.3952 it reached earlier in the week.

Traders said it could quickly fall back towards support just under $1.3800 in the event of any policy surprises, though any doubts the ECB was preparing for some form of easing in the coming months could send it upwards again.

"The market is not expecting any policy action today and our view is if there is going to be any policy easing it will be in June when they will have new economic forecasts," said Lee Hardman, a foreign exchange strategist at Bank of Tokyo Mitsubishi in London.

"If (ECB President) Mario Draghi doesn't escalate the concern over the strength of the euro at the press conference then the euro will rise, probably above $1.40."

Share and bond markets were also on the front foot having received a boost from supportive comments from U.S. Federal Reserve chief Janet Yellen on Wednesday, and from signs that Russia was trying to head off a full-blown conflict in Ukraine.

Furthermore, upbeat Chinese trade data overnight provided some signs of stabilisation in the world's second-largest economy.

At 0730 GMT, the FTSEurofirst 300 index of top European shares was up 0.3 percent at 1,348.46 points, as the FTSE in London, the CAC 40 in Paris and Frankfurt's Dax all made similar gains.

Russian stocks continued to rally, hitting a two-month high as the rouble took a breather having touched a 2-1/2 month high against the dollar on Wednesday.

FED QUARTET

In Asia, Tokyo's Nikkei share average had ended 0.9 percent higher, while MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.5 percent to inch away from five-week lows hit on Wednesday.

China's exports and imports returned to slight growth in April after a surprise fall last month, offering signs that Beijing's use of targeted policy measures to underpin growth may be starting to stabilise the economy.

Mainland Chinese shares rose 0.8 percent, also helped by bets on further stimulus measures after the central bank warned of a deepening economic slowdown.

Sentiment had already been buoyed after comments on the "considerable slack" in the U.S. labour market from Yellen had bolstered the view the Fed would continue to stay in supportive mode for plenty of time yet.

She, along with a quartet of fellow Fed policymakers, speak later in the day in the U.S.

Yellen's remarks also kept the 10-year U.S. Treasuries yield at 2.590 percent, near Monday's three-month low of 2.572 percent. They filtered into Europe, where yields on benchmark 10-year German Bunds edged back down in early deals.

The pound held near a five-year high against the dollar on rising expectations the Bank of England, which also meets later in the day, could tighten policy before the Fed, probably early next year. It last stood at $1.6961 versus Tuesday's high of $1.6997.

The Australian dollar climbed 0.5 percent to $0.9352 after local data showed that employment had risen more than expected in April.

With risk sentiment improving slightly, the yen stepped back from a three-week high to 101.77 yen on the dollar while gold sagged to $1,290.30 per ounce.

(Reporting by Marc Jones; Editing by John Stonestreet)