* Euro, sterling hold onto Monday’s gains
* ECB debate shifting to rate path from quantitative easing, sources say
* Sterling rose as EU, Britain reached transition agreement (Updates prices, adds analyst comments)
By Masayuki Kitano
SINGAPORE, March 20 (Reuters) - The euro on Tuesday held on to gains made the previous day, when it rose on revived bets for the European Central Bank to wind down its bond-buying stimulus this year and to raise interest rates around the middle of 2019.
The euro, which advanced 0.4 percent on Monday, held steady on the day at $1.2336.
The common currency had drawn strength on Monday from a source-based Reuters report that ECB policymakers are shifting the focus of their debates.
Policymakers are comfortable with market forecasts, including for a rate hike by mid-2019, and the debate is increasingly about the steepness of the rate path thereafter, as some want future expectations contained, given the slow rebound in inflation, five sources with direct knowledge of the discussion told Reuters.
Sterling also stood tall after setting a one-month high against the dollar on Monday, as Britain and the European Union agreed to a 21-month post-Brexit transition period and a potential solution to avoid a “hard border” for Northern Ireland.
Sterling held steady at $1.4024. On Monday, the pound rose as high as $1.4088, its strongest level since Feb. 16.
The strength in euro and sterling helped weigh on the dollar, which last stood at 89.951 against a basket of six major currencies, down from Monday’s intraday high around 90.345.
Market participants are now pondering whether the U.S. Federal Reserve, which holds a two-day policy meeting that ends on Wednesday, will signal a faster pace of rate increases in the coming months as the labour market tightens further.
Interest rate futures imply traders have fully priced in a rate increase this week, which would raise the target range to between 1.50 percent and 1.75 percent.
The dollar rose 0.2 percent to 106.32 yen, inching away from a 16-month low of 105.24 yen set in early March.
On technical charts, the dollar seems to have found strong support in the 105.00 to 105.50 yen area, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.
He added that the dollar’s yield advantage over the yen could also help bolster the greenback.
“Once Japan’s new financial year starts (in April), Japanese institutional investors are likely to become active in foreign bond investments,” Murata said, referring to the possibility they will take on foreign-exchange risk in search of better returns abroad.
Still, some traders saw limited upside potential for the dollar, with the yen seen supported by signs of a retreat in investor risk appetite.
“It’s pretty easy to stay short dollar/yen in this environment given the risk aversion,” said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore.
The yen is a traditional safe haven currency that tends to attract demand in times of market turmoil.
U.S. equities fell on Monday, with the S&P and Nasdaq suffering their worst day in just over five weeks, as concerns over increased regulation for large tech companies was spearheaded by a plunge in Facebook shares. (Reporting by Masayuki Kitano; Editing by Simon Cameron-Moore and Richard Borsuk)