(Corrects name and organisation of Paul Brain in 10th paragraph)
* Italian bond yields drop on revived coalition deal
* Data dump including payrolls to keep dollar gains capped
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, June 1 (Reuters) - The euro edged higher on Friday and looked set to break a six-week losing streak, supported by a drop in Italian bond yields after a revived coalition deal between two anti-establishment parties pulled the country back from snap elections.
With worries that political turmoil in Italy would roil markets receding, investors have - after strong inflation data this week - shifted their focus back to predicting when will the European Central Bank raise interest rates.
Annual inflation in the 19 countries sharing the euro rose to 1.9 percent in May from 1.2 percent in April, well above expectations for a 1.6 percent increase.
“After the rollercoaster ride in the euro this week, markets are back to focusing on fundamentals and the inflation data will give food for thought to those who are betting on a sustained euro decline,” said Marc Ostwald, global strategist at ADM Investor Services International based in London.
On Friday, the single currency edged 0.2 percent higher to $1.1710. On a weekly basis, it is set to climb 0.5 percent, breaking six-week losing streak.
The euro plunged earlier in the week and Italian bond yields soared, with 2-year yields posting their biggest one-day jump in 26 years on Tuesday, on fears that fresh elections in the euro zone’s third biggest economy could strengthen the hand of the anti-establishment parties there.
But the past two days have seen some stability with the euro recouping losses thanks in part to renewed efforts to form a government.
A new government in Spain, with the leader of the Spanish Socialist party Pedro Sanchez becoming prime minister, was greeted with relative calm in currency and bond markets.
Investors were also getting more cautious about the dollar’s recent move higher — it hit a 6-1/2 month high against a basket of its rivals earlier this week — on trade war fears and rising concerns the U.S. economic momentum may soften.
“At these levels, I think the dollar is nearly priced to perfection and we think the euro should see a rebound from later this year,” said Paul Brain, head of fixed income at Newton Investment Management, a subsidiary of BNY Mellon Investment Management which manages $49.8 billion in assets globally.
The dollar was broadly flat at 93.92 against its basket after posting its biggest monthly rise since November 2016 in May.
It chalked up some against the yen, rallying nearly half a percent to 109.27 yen, its biggest daily rise in two weeks.
Risk appetite was muted after the Trump administration slapped tariffs on steel and aluminium imports from the EU, Mexico and Canada, raising risks of a full-blown trade war.
Canada and Mexico retaliated against the United States decision while the European Union had its own reprisals ready to go..
The Canadian dollar stood at C$1.2940 to the U.S. dollar , after falling 0.65 percent the previous day.
The Mexican peso hit a 15-month low of 20.050 to the dollar on Thursday and last stood at 19.85 per dollar.
A heavy slate of data on Friday is also expected to keep investors on the sidelines. The US jobs report for May is expected to show almost 190,000 jobs added, keeping the Fed on track to raise rates later this month.
Reporting by Saikat Chatterjee; Additional reporting by Hideyuki Sano in TOKYO; Editing by Peter Graff and John Stonestreet