* Dollar edges up ahead of Fed<\/p>\n
* Euro depressed after ECB\u2019s Knot\u2019s comments<\/p>\n
* Sterling hits fresh May 2018 high<\/p>\n
* Graphic: World FX rates tmsnrt.rs\/2RBWI5E<\/p>\n
LONDON, Jan 27 (Reuters) – The euro fell on Wednesday, under pressure after a European Central Bank official said the bank was monitoring the currency closely, while the dollar perked up ahead of the Federal Reserve\u2019s first meeting of the year.<\/p>\n
ECB governing council member Klaas Knot said the central bank has room to cut its deposit rate further, should it be necessary to improve financing conditions and reach its inflation target.<\/p>\n
Knot\u2019s comment constituted the most explicit hint to date from an ECB policymaker about the possibility of a rate cut to stem a rally in the euro – a move that seemed highly unlikely until recently.<\/p>\n
The single currency is up almost 15% since March last year, against a dollar that most analysts expect to decline further. Knot\u2019s comments came as the euro, already weaker on the day, extended losses against the greenback.<\/p>\n
It last traded 0.3% lower at $1.2120.<\/p>\n
Analysts said reports on Tuesday that the ECB was studying whether differences with the Fed\u2019s policy in the United States were boosting the euro – part of a wider review of financing conditions – would not have a material effect on the currency.<\/p>\n
It\u2019s \u201cprobably one of those headlines where it\u2019s a buy on the dip moment in euro\/dollar here,\u201d said Jordan Rochester, FX strategist at Nomura in a note to clients. He remains long on the pair with a target of $1.25 by the end of March.<\/p>\n
Alexandre Dolci, G10 FX strategist at BBVA, has a similar outlook.<\/p>\n
\u201cDespite the heavy positioning, we continue to favour buying euro\/dollar on dips as we see the pair steadying in a $1.20-$1.25 range,\u201d he said.<\/p>\n
ECB President Christine Lagarde has repeatedly said the central bank is carefully monitoring the single currency\u2019s exchange rate.<\/p>\n
\u201cWe suspect they might find that higher inflation is more credible in the US and that euro\/dollar spot is closer related to the global manufacturing sector (which is doing well), not European services and maybe, that expectations are elevated in terms of Europe\u2019s comeback,\u201d said Lars Sparres\u00f8 Merklin, senior analyst at Danske Bank. \u201cEither way, this adds to a growing number of countries who appear uncomfortable with USD weakness.\u201d<\/p>\n
The dollar reversed early declines in Asia to trade up 0.3% at 90.393 as markets waited for comments from Federal Reserve Chair Jerome Powell, who is likely to renew a commitment to ultra-easy policy.<\/p>\n
Powell is due to speak at a news conference after the central bank\u2019s two-day policy meeting, which ends Wednesday.<\/p>\n
Earlier this month, he said in a web symposium with Princeton University that the U.S. economy is still far from the Fed\u2019s inflation and employment goals, and it is too early to discuss altering monthly bond purchases.<\/p>\n
\u201cWhile the Fed had been consistent for the past few months that the balance of risks was still to the downside, we could see a more neutral stance being taken,\u201d said John Velis, FX and macro strategist at BNY Mellon.<\/p>\n
\u201cThis would be seen as a marginally hawkish turn on the Committee, but we think that the Chair will make it quite clear that neither interest rate rises nor any quantified timeline for tapering bond purchases is under consideration.\u201d<\/p>\n
Elsewhere, the British pound climbed to its highest since May 1, 2018 at $1.3753 before trading flat at $1.3730.<\/p>\n
The Aussie dollar slipped 0.4% to 77.18 U.S. cents, paring Tuesday\u2019s 0.5% rally.<\/p>\n