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European shares higher on reports of US-UK trade deal

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BoE expected to cut rates after Sweden and Norway holds

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Fed caution supports dollar in FX markets

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Oil edges out of recent trough

By Marc Jones

LONDON, May 8 (Reuters) - World shares inched higher on

Thursday buoyed by U.S. President Donald Trump's promise of a

first trade deal in his global tariff war - tipped to be Britain

- while the dollar gained as markets pushed out the chance of

near-term Fed rate cuts.

Traders were also limbering up for an expected Bank of

England quarter-point rate cut later in the day. Sweden and

Norway had already left their rates steady, but both hinted at

future cuts given all the global uncertainty.

Europe's main stock markets opened higher, led by a 1% rise

from Germany's export-heavy DAX and a 0.3% gain for

London's FTSE, plus a similar lift for sterling against

the euro, on the trade deal signals.

U.S. President Donald Trump had posted on social media that

he would hold an Oval Office press conference later on a "major

trade deal with representatives of a big, and highly respected,

country," using all capitalized letters.

Wall Street futures were up nearly 1% too, but

economists are eager to see the deal's details later and whether

the baseline 10% tariff Trump has slapped on all countries up

until now can be negotiated away.

Investors are also anxiously awaiting planned talks between

U.S. and Chinese officials in Switzerland on Saturday, which

could mark the first step in dialling down the damaging trade

war between the world's top two economies.

Markets were still digesting the Federal Reserve's decision

to leave U.S. interest rates in the 4.25%-4.5% range for a third

straight meeting and its warning that the stagflationary risks

of higher inflation and higher unemployment had risen.

Chair Jerome Powell said the Fed was still in "a good place"

in terms of its policy, given that it wasn't clear if the U.S.

economy will continue its steady growth, or wilt under mounting

uncertainty and a possible spike in inflation.

"It's not at all clear what the appropriate response for

monetary policy is at this time," Powell said, prompting markets

to scale back the chance of a June rate cut to just 20%, from

30% a day earlier, while a move in July is now priced at 70%,

compared with a near-certainty just a week ago.

"The addition of the phrase 'the FOMC....judges that the

risks of higher unemployment and higher inflation have risen'

says it all," Fitch Ratings Chief Economist Brian Coulton said.

"The tariff shock will reduce real GDP growth and raise prices

at the same time."

UNCERTAINTY

In the bond markets, 10-year U.S. Treasury

yields edged up 2 bps at 4.29%, while Germany's 10-year yield

- the euro area's benchmark - also rose fractionally

to 2.48%.

The Fed's wait-and-see message also gave the dollar index a

lift. After a brief wobble in Asia, it regained traction to sit

0.5% higher in Europe at just above the psychological 100

points threshold.

Trade deal hopes also saw Britain's pound climb as

much as 0.5%, although it eased back slightly to $1.3315 as the

focus turned to the Bank of England's widely expected

quarter-point rate cut later.

Its Governor Andrew Bailey and his BoE colleagues have long

stressed the need for a gradual and careful approach to lowering

borrowing costs. But analysts think that could be about to

change.

PGIM's Guillermo Felices said his firm expects three more

rate cuts after this one as the BoE's rate setters begin to put

more focus on the spillovers from the global trade war.

"The front end rates market is almost in line with our

view," he added, pointing to pricing of the next cut coming in

July plus two more before the end of the year.

TECH TALK

Overnight in Asia, MSCI's broadest index of Asia-Pacific

shares outside Japan had ended down 0.3% while

Japan's Nikkei gained 0.4% and Chinese blue chips

rose 0.5% as they continued to recover ground lost

since Trump's "Liberation Day" tariffs last month.

Wall Street had seen a late rally too after reports that the

Trump administration was planning to rescind and modify a Joe

Biden-era rule that curbed the export of sophisticated

artificial-intelligence chips.

Nvidia ( NVDA ) shares jumped 3% although Google's parent

firm Alphabet suffered a 7.2% tumble on reports that

Apple ( AAPL ) is readying a new artificial-intelligence

enhanced web browser.

In commodities markets, the brighter trade deal sentiment

lifted oil prices after they had fallen more than $1 on

Wednesday. U.S. crude futures rose 0.7% to $58.50 a

barrel while Brent was at $61.50 per barrel, up 0.6% on

the day.

In precious metals, gold prices rose 0.3% to $3,374.5

an ounce amid the uncertainties about Fed policy outlook, but

still short of its record high of $3,500.

($1 = 0.7527 pounds)

(Additional reporting by Stella Qiu in Sydney, Editing by

William Maclean)