* Dollar index edges down 0.1 percent
* Focus on Powell’s testimony due later on Tuesday
* U.S. economic indicators this week also seen as key
* Traders brace for German, Italian political developments
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Jemima Kelly
LONDON, Feb 27 (Reuters) - The dollar edged down against most major currencies on Tuesday, with traders cautious ahead of testimony from new Federal Reserve chief Jerome Powell that could determine whether the currency’s recovery from a three-year low has more room to run.
Powell’s Congressional testimony will his first public appearance since being sworn in as chairman earlier this month. Traders will watch closely to see whether the new chief will continue on the gradual monetary rate path pursued by his precedessor Janet Yellen, or whether he will take a more hawkish approach.
Several policymakers have argued the Fed is due for a broad rethink of its approach to inflation, with a faster pace of rate increases needed to keep rising consumer prices in check.
The dollar slumped to its lowest levels since late 2014 against a basket of major currencies earlier in February, but it has since recovered almost 2 percent.
On Tuesday, the index was down 0.1 percent at 89.776.
“The market is a little bit cautious ahead of this speech, but we think he’s likely to stress the continuity of monetary policy...because it wouldn’t be in his interest to have any major market reactions - that would make his job more difficult,” said Commerzbank currency strategist Anje Praefcke, in Frankfurt.
“What he’s likely to state is what we’ve seen in the FOMC (Federal Open Market Committee) minutes: that the outlook for the U.S. economy has improved considerably, short-term, and that both wages and consumer price inflation have recently surprised on the upside.”
Roy Teo, investment strategist for LGT Bank in Singapore, also said Powell would probably sound optimistic on the economic outlook and that he would stress patience in assessing whether inflation will head higher.
“The dollar is unlikely to get a major lift after Powell’s speech,” Teo said.
Teo added that this is especially the case given the prevailing market expectations for the Fed’s preferred inflation measure, the core personal consumption expenditures (PCE) price index, due on Thursday.
Economists polled by Reuters expect the core PCE to increase 1.5 percent year-on-year in January, which would be the same as December’s pace and still some way off from the Fed’s 2 percent target.
This week is crammed with U.S. economic data, with consumer confidence, revised fourth-quarter growth, manufacturing and personal income and spending numbers all due.
As the dollar eased, the euro edged up 0.1 percent to $1.2332, with investors seen unlikely to take on big positions this week ahead of key political events in Europe.
Italians vote in a national election on Sunday, while the leading political parties in Germany will decide on a coalition deal that could secure Angela Merkel a fourth term as chancellor.
Against the yen, the dollar edged up 0.1 percent to 107.05 yen. (Reporting by Jemima Kelly; Additional reporting by Masayuki Kitano in Singapore and Tomo Uetake in Tokyo)