FOREX-Euro edges higher on ECB day, all eyes on inflation comments

* Euro edges 0.2% higher ahead of ECB

* Sterling stabilises as USD rally cools off

* ECB meeting could flag more policy easing

* Graphic: World FX rates in 2020

LONDON, Sept 10 (Reuters) - The euro edged higher on Thursday against a weaker dollar but gains were capped by the possibility that the European Central Bank could flag more policy easing if it deemed economic recovery and inflation are at risk from currency appreciation.

Most other currencies too ground higher as the dollar resumed its downtrend following a U.S. technology shares bounce that suggested a improvement in risk appetite. The greenback had hit a one-month high against a currency basket on fears world markets were headed for another downturn.

Attention however centered on the euro and the ECB’s governing council meeting later on Thursday. The bank is all but certain to keep policy unchanged but President Christine Lagarde’s comments on the euro’s recent rise to two-year highs will be closely monitored.

It has risen almost 6% against the dollar from June lows.

“A dovish emphasis seems likely – perhaps even talking up rate cuts – to attempt to stem the rise of the euro and set the scene for potential easing later this year,” analysts at Citi told clients.

Such expectations grew after data showed euro area consumer prices turned lower in August for the first time since 2016.

Lagarde may also comment on future inflation strategy after the U.S. Federal Reserve’s recent policy switch that implied keeping interest rates lower for longer.

The euro bought $1.1829, up 0.2% on day. It had received a boost on Wednesday after Bloomberg News reported that ECB officials are growing more confident in the bloc’s economic outlook.

But many reckon the ECB will struggle to tamp down euro strength, given greater investor confidence in the bloc after the creation of a joint recovery fund and a robust response to the pandemic.

Moreover, euro interbank rates have hit record lows this week, reflecting abundant liquidity in the financial system which banks are unable to adequately deploy.

Petr Karpata at ING Bank said the Bloomberg report suggested the ECB sees less need for imminent action, and predicted Lagarde would restrict herself to saying the exchange rate was being closely monitored.

“All this suggests a modest upside risk to euro/dollar with the pair moving to or above the 1.1850 level today,” he said.

Elsewhere, dollar weakness allowed sterling to stabilise at $1.30, having dipped to a six-week low of $1.2839 on Wednesday after Britain unveiled draft legislation which raises risks of it exiting the EU single market in four months time with no trade agreements in place.

The pound slipped to 90.90 pence per euro however, close to a six-week low.

The Australian dollar fell to $0.7268 amid concerns abound worsening diplomatic ties with China over the treatment of the two countries’ journalists. Investors are also monitoring an outbreak of coronavirus infections in the state of Victoria. (Reporting by Sujata Rao)