Federal Reserve sets for another rate hike

The European market retreated on Wednesday as investors braced themselves for another aggressive interest rate move by the US Federal Reserve.

In anticipation of further aggressive interest rate increases from central banks over the next few days, European markets and US markets both fell back sharply yesterday as bond yields both in the US and across Europe reached their highest levels in more than 10 years.

It now appears that after the slide in US stocks, which saw the S&P500 close at a one-month low, the markets in Europe will continue to follow the negative theme along with another weak opening ahead of today's Federal Reserve rate decision.

The US dollar edged higher ahead of the Fed’s meeting

During early European trading Wednesday, the US dollar rose again to near a 20-year high as Russian President Vladimir Putin raised tensions over Ukraine.

In addition, the dollar has also benefited from the widely held expectation that the Federal Reserve will announce an interest rate increase of at least 75 basis points later Wednesday in an effort to combat stubbornly high inflation.

Fed’s meeting

Following last week's higher-than-expected US inflation reading, it is widely believed that the Fed will raise interest rates by at least 75 basis points. However, some are also pricing in a 100 basis point hike, which currently has a less than 16 per cent chance of occurring.

A decision is expected at 14:00 ET (18:00 GMT), as well as an update on the Fed's quarterly economic projections, which should provide insight into the direction of interest rates, the expected duration of inflation decline, and the potential impact on economic growth.

Euro and Pound against the dollar

EUR/USD remains in a downtrend from the highs this year, with trend line resistance at around 1.0180. Further gains will be signalled if 1.0200 is broken. There is still a bias toward the previous lows at 0.9865 and 0.9620.

The GBP/USD pair found support at 1.1350, but remains weak, with little sign of a turnaround. Minor resistance is located at 1.1500, if broken, we may see 1.1750. There is still a strong bias toward a move toward the 1.1000 area, with 1.1800 remaining in play. 

Featured events of the day

In addition to the Federal Reserve, the Bank of England, the Swiss National Bank, the Bank of Japan, and the Norges Bank in Norway will also announce policy decisions this week. 

European economic data are largely sparse on Wednesday, although the CBI industrial trends orders survey is expected to show a decline in business confidence in the UK.