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* Banks snap 3-day losing streak
* Steel stocks fall after U.S. Steel's weak forecast
* Swiss watchmakers rise on strong watch export data (Updates market action, adds comments)
Sept 19 (Reuters) - A rally in bank stocks for the first time in four sessions lifted European shares on Thursday, after the U.S. Federal Reserve cut interest rates but set a higher bar for further reductions.
European banks rose 1.4%, the most among the major sectors, also benefiting from investors rotating into underperforming stocks. Banks are the only major sector in the red so far this year.
Central banks around the world have been loosening monetary policy to stem a slowdown in economic growth. Last week, the European Central Bank cut interest rates deeper into negative territory and asked governments to do more to prop up the euro zone economy.
However, upbeat economic data last week has resulted in central banks taking a more guarded approach to rate cuts. Following mixed signals from Fed Chair Jerome Powell, all eyes are now on the Bank of England's policy move, due at 1100 GMT, where it is expected to stand pat on rates.
"Powell could be waiting to see if the (U.S.) President will deliver an interim trade deal and if fiscal and monetary stimulus from the other major central banks will help provide some stability to the global economy," said Edward Moya, senior market analyst at OANDA.
The pan-European STOXX 600 index gained 0.2%, with lender-heavy Milan and Madrid outperforming.
Swiss watchmakers Swatch and Richemont rose more than 1% after strong watch export data, lifting the STOXX 600. The benchmark index has risen 15% so far this year.
British online trading platform IG Group topped the STOXX 600 after adding more clients amid improved trading activity in August.
Clothing retailer Next PLC was the biggest decliner on the index after saying the first few weeks of the Autumn season had been disappointing.
European steel stocks ArcelorMittal, Salzgitter , Voestalpine, SSAB, Outokumpu and Thyssenkrupp declined after United States Steel's gloomy current-quarter earnings forecast.
Finnish engineering group Wartsila dropped 4% after HSBC cut its price target on the stock as a result of a profit warning on Wednesday. (Reporting by Shreyashi Sanyal and Susan Mathew in Bengaluru Editing by Saumyadeb Chakrabarty)