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The euro firmed a touch on Thursday ahead of the European Central Bank's (ECB) policy meeting, where traders will focus on rate setters' remarks on their future path as a cut at this meeting is a done deal.

Central banks were in focus, as they have tended to be in recent months, with the Canadian dollar firming a little after having weakened into the Bank of Canada's Wednesday meeting when it cut its key policy interest rate as widely expected. The currency was last at C$1.3679 per dollar.

Investors are also grappling with the implications for the Federal Reserve of several pieces of U.S. data this week showing employment growth moderating, albeit along with a pick up in service sector activity.

Markets are now pricing in nearly 50 basis points of Fed rate cuts this year, with the first expected to come in September.

The ECB remains the day's focus, and the euro gained 0.11% to $1.0882, sitting just shy of a two-and-a-half month top of $1.0916 hit earlier in the week.

A cut at Thursday's meeting has long been expected, and the euro's recent strengthening against the dollar has come as investors reduced their expectations of significant further rate cuts this year, while, this week, slightly increasing bets on monetary easing in the U.S.

Markets are currently pricing around 63 basis points of ECB rate cuts this year, implying a 25 bp cut at Thursday's meeting, and one or maybe two more such cuts by year end.

"Should they surprisingly hold, the euro could face a brief earthquake... but a cut looks almost guaranteed and is fully priced in, so the attention will be on communication," said Francesco Pesole, FX strategist at ING in a note.

"We think it is likely there will be almost no new forward guidance, with the ECB potentially signalling any further easing would only be gradual -in line with (policy makers') off-meeting comments - and that there are still risks to inflation."

The euro was also a fraction firmer on the pound at 85.03 pence though towards the bottom of its recent range.

Versus the dollar, sterling was up a whisker at $1.2795.

YEN RISES

Elsewhere, the yen was steady on the day at 156.15 per dollar, as investors digested Thursday remarks from Bank of Japan Governor Kazuo Ueda that it would be appropriate to reduce the central bank's bond buying as it moves toward an exit from massive monetary stimulus.

His comments come ahead of the BOJ's two-day monetary policy meeting next week.

"This was almost a momentum play from the Japanese central bank - that is, add in JPY positive news flow when funding currencies - JPY and CHF - were already being covered and bought back, and the result was the JPY rally gaining additional legs," said Chris Weston, head of research at Pepperstone..

The Japanese currency had a brief rally earlier in the week as investors unwound positions in yen-funded carry trades, following a strong election victory for Mexico's ruling party which sparked concern about disputed constitutional reform.

That resulted in a squeeze on long peso/short yen positions, which has been a favourite among carry trades.

In a carry trade, an investor borrows in a currency of a country with low interest rates and invests the proceeds in a higher-yielding currency.

The peso was last 0.5% firmer against the yen, extending its 2.6% gain in the previous session. It had fallen roughly 6% against the Japanese currency at the start of the week, in the wake of Mexico's election results.

Another favoured funding currency, the Swiss franc, also strengthened sharply against the euro and the dollar earlier in the week. It was a touch firmer against both on Thursday at 0.9701 to the common currency and 0.8917 to the dollar.