By Saikat Chatterjee
HONG KONG (Reuters) - Asian markets edged lower on Tuesday and the Australian dollar steadied as investors stayed on the sidelines ahead of a Reserve Bank of Australia policy decision that might result in an interest rate cut.
The RBA last cut its cash rate by 25 basis points to 2.25 percent in February, and the market had been expecting cuts in March and April that never came.
This time derivative markets see a 70 percent chance of a quarter-point cut, while interbank futures 0#YIB: give a 58 percent chance, with expectations heightened by the central bank's unease with the Australian dollar's strength.
"There is some risk that the currency will prove the tipping point in the rate decision," wrote CitiFX Strategy. "The RBA has expressed a preference for AUD to trade closer to $0.7500, so it is unlikely to look favorably upon recent strength above
$0.8000."
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The Australian dollar was trading at $0.7849 before the rate decision, having hit a three-month high above $0.80 last week.
Australian stocks held on to their early gains while the MSCI's broadest index of Asia-Pacific shares outside Japan was slightly down at 0.2 percent.
Liquidity was lacking with markets in Japan, South Korea and Thailand on holiday and little in the way of major economic data on the docket for Tuesday.
This week's most anticipated data, U.S. payrolls, will be released on Friday.
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A survey released on Monday showed China's factories suffering their fastest drop in activity in a year in April.
Surveys for Taiwan and Japan showed an index of factory activity slid below the 50-point level that separates growth from contraction compared to the previous month.
Even market darling, India, has disappointed with softening domestic demand weighing on manufacturing growth.
The overall picture suggests Asian policymakers may have to launch a fresh round of easing if U.S. jobs data on Friday undershot forecasts.
"All this points to more easing by central bankers, although this may prove less effective than in the past," Frederic Neumann, co-head of Asian economics at HSBC in Hong Kong, wrote in a note to clients.
Meanwhile on Wall Street, the Dow had ended Monday up 0.26 percent, while the S&P 500 gained 0.29 percent and the Nasdaq 0.23 percent.
Stirrings of recovery in euro zone economic data had helped European shares higher on Monday, but kept sovereign bonds under selling pressure.
Yields on 10-year German bunds climbed to 0.46 percent and levels last seen before the ECB began buying bonds earlier this year.
A sea change across European markets last week saw the biggest rise in German yields since mid-2013 and the sharpest rally in the euro in 3-1/2 years.
The single currency has since faded from a two-month peak of $1.1290 to stand at $1.1145 on Tuesday, in part because the ECB remains committed to its aggressive easing campaign for at least another year.
The euro also lost a bit of ground against the yen, slipping to 133.88 yen from Friday's two-month high of 135.29, while the dollar held at 120.15 yen.
Bracing for a U.K. election on Thursday that is likely to be the most closely fought in recent history, sterling fetched $1.5122, not far off its one-week low of $1.5091 set overnight. It has fallen more than 2 percent since last Thursday.
In commodity markets, Brent oil hit a 2015 high before easing back as Saudi Arabia's plan to halt bombing in Yemen eased tensions over the security of oil Middle East supplies.
Brent crude was quoted slightly lower at $66.36 a barrel, after touching a top of $67.10, while U.S. crude eased 7 cents to $58.86.
(Additional reporting by Wayne Cole in SYDNEY; Editing by Simon Cameron-Moore)