* Euro rallies after inflation data cool ECB easing talk
* Caution dominates before Federal Reserve policy decision
* Nikkei ends positive but still sheds 3.5 pct in April
* China's yuan on track for fourth monthly loss
By Marc Jones
LONDON, April 30 The euro recovered and euro
zone government bonds retreated on Wednesday as inflation stayed
just about strong enough for the European Central Bank to put
off taking any action when it meets next week.
With investors also awaiting the outcome of a U.S. Federal
Reserve meeting later and eyeing developments in Ukraine,
cautious markets kept moves elsewhere to a minimum.
Futures prices pointed to a flat start to early Wall Street
trading after a strong performance over the last two
weeks. U.S. government bonds and gold lost ground as traders
counted down the final few hours until the Fed meeting, when it
is widely expected to keep scaling back its stimulus
In Europe, the ECB has been talking for months about the
possibility of further support measures if low inflation becomes
entrenched and fighting it is made harder by a strong currency
and "unwarranted" rises in borrowing costs.
Figures on Wednesday shown euro zone inflation nudged up to
0.7 percent in April. Though it remained well below the ECB's
target rate of just below 2 percent, the figure came as a relief
after a weak reading out of Germany on Tuesday.
It saw the euro jump, and by the time U.S. trading
gathered pace it had climbed 0.3 percent to $1.3852, within
shouting distance of this year's highs above $1.39.
ECB head Mario Draghi said last week that if the inflation
outlook were to deteriorate, the ECB could respond with a
"broad-based asset purchase programme", probably quantitative
easing - effectively printing money to buy assets.
On Monday, however, he told lawmakers from Germany's ruling
coalition that while low inflation would persist in the euro
zone, he did not expect deflation, according to a source who
attended the meeting.
"The two important data for the ECB, inflation today and M3
(money supply) yesterday came in on the weak side which means
the ECB is really under pressure, the problem is they have been
under pressure for a while," said Philippe Gudin de Vallerin
head of euro research for Barclays.
"They are definitely not complying with their mandate... The
key is the euro, they really need to weaken the euro but it is
Euro zone government bonds across the spectrum from Germany
and France to Greece and Portugal also switched direction, with
prices reversing as the prospect of steady ECB rates reheated
concerns about their current value for money.
European stocks, meanwhile, took a breather, having
jumped to a near four-week high on Tuesday thanks to combination
of strong earnings, merger moves and relief at the mild tone of
sanctions imposed on Russia by the West.
Asian shares had struggled while the yen strengthened
after upbeat Bank of Japan economic projections suggested no
additional stimulus was on the near-term horizon.
Japan's Nikkei stock average edged up on Wednesday
but logged a drop of 3.5 percent in April, while China's yuan
completed its fourth straight month of losses as it
ended April at an 18-month low..
Later on Wednesday, Fed officials are expected to decide
unanimously at the conclusion of their two-day meeting to
continue tapering the central bank's massive bond-buying
stimulus. Investors will focus on what their statement implies
about the monetary policy outlook.
"Fed policy is basically on cruise control while the
(policy) Committee waits to see how the economy rebounds from
the cold weather, how the labor market is progressing, and
whether inflation returns to more normal levels," said Marshall
Gittler, head of FX strategy at IronFX Global.
U.S. jobs data - invariably a focus for investors - is due
Meanwhile, markets digested some mixed signals from Europe.
In its latest quarterly bank lending survey, the ECB painted
a more upbeat picture than it had in Tuesday's disappointing
euro zone credit reading, with banks sensing an improvement.
Figures from Madrid earlier showed Spain's economy saw its
strongest quarterly growth in six years in Q1 although retail
sales both there and in Germany sagged last month.
Market participants continued to track developments in
Ukraine, where masked gunmen in military fatigues seized
government offices in another town, in a further sign that
pro-Western authorities in Kiev are losing control of the
country's eastern industrial heartland bordering
The dollar recovered most of the day's losses on the yen to
102.54 yen, have struck a low of 102.28 yen soon after
the BOJ revealed its upbeat forecasts.
In commodities trading, spot gold slipped 0.2 percent
to $1,292.80 an ounce as the tensions surrounding producer
Russia, as well as a ban in Indonesia, left nickel on
track for monthly gain of 15 percent.
U.S. crude dropped 1 percent to $100.27 per barrel,
on expectations that U.S. inventories would hit the highest
level on record. Brent fell to $108.41
(Reporting by Marc Jones; Editing by Larry King)