By Saikat Chatterjee
LONDON (Reuters) - The euro hovered below a 14-month high on Thursday before a policy decision by the European Central Bank that may lay the grounds for a policy shift later this year.
But with the common currency up 3 percent over the last month and German bond yields firming in recent weeks, its rate-setters will be wary of sending hawkish signals that could risk stifling a broadening economic recovery while inflation is low.
Currency markets were hemmed in tight ranges in early trades, with the dollar edging higher from a 10-month low tested earlier this week.
"The markets are in a wait-and-watch mode before the ECB decision though policymakers won't be very happy about the recent euro strength," said Michael Every, senior Asia-Pacific strategist at Rabobank in Hong Kong.
The euro is now at $1.15135, backing off a tad from Tuesday's $1.1583, its highest level since May 2016 but still maintaining gains of 3.0 percent since ECB President Mario Draghi's Sintra speech and comfortably holding above the 1.15 line breached on Tuesday.
Draghi's June 27 comments in Sintra, Portugal, hinting at the possibility of changes to the central bank's aggressive stimulus sparked a "taper tantrum" that sent the euro and bond yields sharply higher.
While most market players expect the ECB will announce at its next meeting in September that it will start tapering its asset purchases, a move this week is not completely ruled out.
Some market participants said there was a chance the euro could be hit if the ECB does not at least tweak its position on Thursday -- possibly by dropping a reference to its readiness to increase the size or duration of its asset-purchase program.
They noted the massive positions investors have built up in the currency. Data from U.S. financial watchdog published on Friday showed speculators last week held the largest net long position in Chicago euro/dollar futures in six years -- calling attention to risks in such positions being unwound.
Chicago futures speculators had at the same time sold the yen believing that the Bank of Japan would stick to its loose monetary policy at Thursday's monetary meeting, with their net short position at two-year highs.
Unlike some other major central banks looking to dial back many years of massive easing, the Bank of Japan has shown no inclination to adjust policy and kept monetary policy unchanged at a scheduled meeting on Thursday.
The dollar's index against a basket of six major currencies stood at 94.904, up 0.1 percent and moving further away from a 10-month low of 94.476 touched on Tuesday.
(Reporting by Saikat Chatterjee; Additional reporting by Hideyuki Sano in TOKYO; Editing by Catherine Evans)