July 26, 2018 / 11:01 AM / 5 months ago

FOREX-Euro settles below 3-day highs before ECB decision; yen up

* Currency markets cautious about outcome of Trump-Juncker summit

* Chinese yuan up half a percent

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, July 26 (Reuters) - The euro held below a three-day high on Thursday as investors moved to the sidelines before a European Central Bank meeting which they will watch for further hints on the pace of policy normalisation.

Existing plans for a gradual tightening in the coming months and next year are expected to be kept in place. Attention will therefore centre on whether the ECB elaborates on how it will use redemptions from its bond purchases after the scheduled close of the quantitative easing programme at end of 2018.

“The key watch points will be the central bank’s interpretation of external risks and an improving inflation outlook, along with any commentary on the future reinvestment policy within its asset purchase programme,” Morgan Stanley strategists said.

The euro was a shade weaker at $1.1715, after gaining 0.4 percent the previous day to its highest since Monday.

The single currency had slipped to a low of $1.1664 before talks on Wednesday between European Commission President Jean-Claude Juncker and U.S. President Donald Trump, who has imposed tariffs on European steel and aluminium and had threatened more on vehicle imports from the EU.

Trump said they had agreed to “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods”. He agreed to refrain from imposing car tariffs while the two sides launch negotiations, easing the threat of a transatlantic trade war.

Currency markets were far more circumspect about the outcome of the summit than equity and bond markets as investors waited for the fine print to emerge on the trade discussions.

“The one thing we have learned from the last 18 months of Trump’s gyrating trade policies is that whatever looks certain today is likely to be undermined tomorrow,” Gavekal strategists said in a note.

YEN GAINS

The Japanese yen made tiny gains against the dollar and other higher yielding currencies as markets waited for the outcome of a Bank of Japan policy review next week.

The yen rallied briefly and yields surged on Monday after sources have told Reuters that the BOJ, facing stubbornly low inflation, is in unusually active discussions before its rate review on July 30-31, with tweaks to its stock-buying techniques on the table

The Japanese currency edged 0.2 percent higher against the dollar to 110.82 yen and was 0.3 percent up at 129.79 yen to the euro.

However, another drop by the Chinese currency after yesterday’s bounce undermined broader risk appetite in the markets. The yuan fell half a percent to 6.79 to the dollar.

A more than 6 percent drop in the value of the Chinese currency since mid-June as trade tensions escalated has put pressure on export-oriented emerging markets.

Investors increased bearish positions over the past two weeks on all emerging Asian currencies, according to a Reuters poll.

Elsewhere, the dollar index held at a two-week low against a basket of six major currencies and was down 0.25 percent at 94.131.

Sterling was broadly steady at $1.3202 as expectations about a rate rise next week from the Bank of England underpinned the currency.

Reporting by Saikat Chatterjee; Editing by David Stamp

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