European stocks rally on eve of Fed rate decision

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European stock markets rose solidly Tuesday, the eve of an expected cut in interest rates from the US Federal Reserve that has been long-awaited by investors.

Tokyo closed down one percent as a strong yen weighed on Japanese exporters.

As the Fed began its two-day meeting, attention turned to US retail sales data due Tuesday that could shed light on the potential size of the rate cut.

Fed boss Jerome Powell has already signalled a rate cut was coming, but debate has focused on whether officials will go for 25 basis points or 50, with some warning that the bigger option could signal there is some concern about the economy.

"Coming at a time where the Fed appear to be more data dependent than ever, a worsening level of consumption could yet help secure a 50-basis point cut given how reliant the US economy is on domestic demand," said Joshua Mahony, chief market analyst at Scope Markets.

Bets on the US central bank opting for a super-sized cut have jumped in recent days, with observers suggesting officials want to go big before a series of smaller reductions.

That has weighed on the dollar, which sank below 140 yen on Monday for the first time in over a year as lower rates make the US currency less attractive to investors. The greenback was firmer Tuesday.

A string of data in the past few months has indicated that US inflation is easing back to the Fed's two-percent target.

At the same time, the labour market has slowed, giving decision-makers room to loosen monetary policy.

Successive big misses on jobs creation in July and August fanned fears of a recession, though policymakers have looked to temper that talk.

"The labour market and inflation data haven't exactly screamed for a massive cut, but that hasn't stopped the market from placing its bets," said independent analyst Stephen Innes.

"With a 50-basis-point cut looking like a sure thing, disappointment could be on the horizon if the Fed pulls back with a mere 25 basis points."

There are concerns too over Europe's biggest economy Germany as a survey Tuesday showed investor confidence fell significantly more than expected this month.

The ZEW institute's closely-watched economic expectations index fell to 3.6 points, down sharply from 19.2 points in August.

Frankfurt and other major European stock markets were up almost one percent, however, approaching the half-way stage Tuesday.

Support has come from the European Central Bank's decision to lower interest rates last week, according to analysts.

The Bank of England is widely expected to maintain its key interest rate at 5.0 percent on Thursday.

- Key figures around 1045 GMT -