European shares and the euro edged higher on Wednesday, with investors waiting to see if the U.S. Federal Reserve will adopt further monetary stimulus to counter faltering economic growth.
The Fed will announce its monetary policy decision at 1630 GMT at the conclusion of a two-day meeting, with expectations high that the central bank will extend its bond-buying programme dubbed "Operation Twist".
The prospect of more liquidity from the Fed had lifted many riskier asset markets on Tuesday, sending the MSCI world share index up over 1.2 percent and leaving investors at risk of disappointment.
"It's almost a sure thing that if the Fed fails to deliver to expectations, markets will quickly unwind yesterday's gains, which were premised almost solely on anticipated Fed action," said Cameron Peacock, an analyst at IG Markets.
The FTSE Eurofirst 300 index of top European shares was up 0.1 percent in early trading at 1,010.41 points after surging 1.6 percent to a one-month high in the previous session.
MSCI's global index added to its gains, rising 0.3 percent to 311.31 for a gain of 1.9 percent this week.
European progress
However, signs that euro zone leaders were moving towards an agreement on a longer-term plan to resolve the region's nearly three-year old debt crisis was helping to ease pressure in the area's sovereign debt markets.
Speaking at a Group of 20 summit in Mexico, they said they aimed to launch a concrete plan to integrate the region's banking sectors at a summit next week with a goal of finalizing a broad deal by December.
A banking union would be a major step forward, long pressed for by the United States and other nations, to break the cycle of debt-laden countries bailing out their troubled banks only to find themselves even deeper in debt.
A separate but more controversial proposal for the euro zone's new rescue fund, due come into force next month, to be used to buy the debt of stricken euro-zone countries, such as Spain and Italy, was also set to be discussed at a meeting of euro area finance ministers on Thursday.
The signs of progress on dealing with Europe's problems and the prospect of Fed pushed Spanish and Italian government bond yields down while safe-haven German government bond yields rose.
Italian 10-year government bond yields were down 8 basis points at 5.85 percent, with the equivalent Spanish debt 9 basis points lower at 6.96 percent.
A report that some hedge funds are positioning for a significant turnaround in the Bund market after yields reached record low levels added to selling in German bonds, pushing the 10-year yield up six basis points to 1.59 percent.
The euro rose to trade around $1.27, adding to gains of nearly 1 percent in the previous session and within sight of a one-month high of $1.2748 hit on Monday.
The euro also gained some support from signs that Greek conservatives may be close to forming a coalition government. It will then try to persuade foreign lenders to allow more leeway in pushing through a deeply unpopular austerity programme.
The dollar was steady against a basket of currencies at 81.437 ahead of the Fed announcement and near a one-month low of 81.186 hit on Tuesday.
"If all the Fed does is to extend "Operation Twist", the dollar could recover," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole.
Commodities eye stimulus
Commodity markets were also watching the Federal Reserve. Any stimulus could boost demand for a wide range of materials and enhance the role of precious metals as a hedge against inflation.
Spot gold rose $4.09 an ounce to $1,620.69 an ounce, eyeing its 2012 high of around $1,790 set in February when the Fed said it would keep interest rates near zero until the end of 2014 at the earliest.
"We think (Fed Chairman) Bernanke will talk up the Fed's readiness to act if required and there is a chance of a policy gesture - an extension to Operation Twist perhaps," said Nick Trevethan, senior metals strategist at ANZ in Singapore.
Brent crude was steady under $96 a barrel on Wednesday, but prices are close to 17-month lows as investors focused on the dimming outlook for global fuel. U.S. July crude, which expires on Wednesday, was up 3 cents at $83.90 per barrel.
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