By Sruthi Shankar and Devik Jain
(Reuters) - European stocks rose on Tuesday as German carmaker Volkswagen (DE:VOWG_p) and online fashion retailer Zalando jumped following upbeat earnings forecasts, while investors awaited the U.S. Federal Reserve's views on a recent pick-up in inflation.
The pan-European STOXX 600 index rose 0.5%, inching closer to a record peak set last year and tracking an overnight rally on Wall Street on optimism about an eventual economic recovery from the pandemic lows.
Volkswagen AG (OTC:VWAGY) jumped 4.9% after the world's second-largest carmaker said it was confident that cost cuts will help improve profit margins in the coming years, boosting European automakers.
Zalando rose 4.1% after it forecast 2021 revenue growth above market expectations following a strong start to the year. Its shares touched a three-week high and lifted the wider retail index.
A gauge of volatility in European stock markets slipped to its lowest level since February 2020.
Investors are focused on the Fed's two-day policy meeting, which will end on Wednesday amid concerns that a potential spike in inflation as economies recover could prompt the central bank to tighten monetary policy sooner than expected.
"The ideal situation for the markets would be the central bank saying, "Yes, we're concerned about inflation and we're going to step in and prevent inflation going too high," said Connor Campbell, financial analyst at spreadbetters SpreadEx.
"Though the issue is going to be that the Fed is completely comfortable with inflation hitting 2% or higher."
Official data showed French final inflation rose largely in-line with estimates in February. Meanwhile, numbers from the ZEW economic research institute, due at 10 am GMT, are expected to show German investor confidence likely rose to 74.0 points in March versus 71.2 points a month earlier.
While optimism about an economic recovery have pushed markets to near record highs, concerns remain about the pace of COVID-19 vaccination in Europe, with Sweden becoming the latest country to pause AstraZeneca (NASDAQ:AZN)'s vaccine after several countries reported possible serious side-effects.
Deutsche Bank (DE:DBKGn) slashed 2021 economic growth forecasts for the euro area by a percentage point, citing spillover of the ongoing pandemic-linked activity curbs, but raised predictions for Britain, the United States and India.
French telecoms operator Iliad SA jumped almost 5%after saying it aimed to turn a core profit for its Italian business in the second half of this year.
German biotech firm Morphosys slumped 8.9% to the bottom of STOXX 600 after forecasting a fall in 2021 revenue.