FOREX and ECB comments remove euro and dollar improves ahead of Fed

* The dollar is ahead of the Fed

* Euro depressed after ECB Knot comments

* British pound hits new high in May 2018

* Chart: global exchange rates tmsnrt.rs/2RBWI5E

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, as the dollar rallied ahead of the first meeting of Federal Reserve of the Year.

ECB Governing Council member Klaas Knot said the central bank has the option of further reducing its deposit rate if there is a need to improve funding conditions and meet its inflation target.

Knot’s comment was the most explicit indication to date from an ECB policymaker about the possibility of a rate cut to stem a rally in the euro – a move that until then seemed highly unlikely. has recently.

The single currency is up nearly 15% since March of last year, against a dollar which most analysts expect to decline further. Knot’s comments came as the euro, already weaker that day, extended its losses against the greenback.

It last traded 0.3% at $ 1.2120.

Analysts said on Tuesday that the ECB was studying whether differences with the Fed’s policy in the United States boosted the euro – as part of a broader review of funding conditions – would not have a material effect on the change.

It’s “probably one of those headlines where it’s about a buy on when the euro / dollar falls here,” Jordan Rochester, FX strategist at Nomura said in a note to clients. . It remains long on the pair with a target of $ 1.25 by the end of March.

Alexandre Dolci, G10 FX strategist at BBVA, has a similar vision.

“Despite the heavy positioning, we continue to favor buying the euro / dollar if there is a dip as we see the pair stabilize in a range of $ 1.20 to $ 1.25,” he said. .

ECB President Christine Lagarde has repeatedly said that the central bank is carefully monitoring the exchange rate of the single currency.

“We suspect that they might find that higher inflation is more credible in the United States and that the euro / dollar spot is more closely tied to the global manufacturing sector (which is doing well), not to European services and perhaps be, that expectations are high in terms of Europe. back, ”said Lars Sparresø Merklin, Principal Analyst at Danske Bank. “Either way, it adds to a growing number of countries that seem uncomfortable with the weak US dollar.”

The dollar reversed early declines in Asia to trade up 0.3% to 90.393 as markets awaited comments from Federal Reserve Chairman Jerome Powell, who is likely to renew his commitment to a ultra-easy policy.

Powell is due to speak at a press conference after the central bank’s two-day policy meeting, which ends Wednesday.

Earlier this month, he told a web symposium with Princeton University that the U.S. economy was still far from the Fed’s inflation and jobs targets and it was too early to discuss the modification of monthly bond purchases.

“While the Fed had been consistent in recent months that the balance of risk was still on the downside, we could see a more neutral stance taken,” said John Velis, FX and macro strategist at BNY Mellon.

“This would be seen as a slightly hawkish turn of the committee, but we believe the chair will make it clear that neither interest rate hikes nor any quantified timeline for phased-out bond purchases are under consideration.”

Elsewhere, the British pound climbed to its highest since May 1, 2018 at $ 1.3753 before trading at $ 1.3730.

The Australian dollar slipped 0.4% to 77.18 cents US, catching up on Tuesday’s rally of 0.5%.