Fed's rate decision is the main focus of investors

With Wednesday's European open fast approaching, the main focus will be on this evening's meeting of the Federal Reserve, at which the central bank is expected to raise rates by another 75 basis points to tame soaring inflation. The dollar remained consolidated, edging further away from recent 20-year highs on Wednesday ahead of the meeting. European attention has remained focused on gas supply and Italian yields, which grew on Wednesday after rating agency S&P Global changed its outlook on Italy's rating to stable from positive.

While 100bps is not ruled out, it has become less likely after two of the most hawkish Fed members, Christopher Waller and St. Louis Fed President James Bullard, said 75bps would remain their preference. US dollar, which had reached a 20-year high earlier this month, modestly retreated in response. It is now a big question whether the Fed will continue raising rates at this pace in September or if recession worries will lead to a less hawkish Fed.

Recent US economic data has become more erratic since the Federal Reserve entered its blackout period. This has caused bond markets to reassess the timing and scope of future rate increases. Even though the headline CPI rate hit a new all-time high of 9.1% in June, almost half of it has come about due to sharp increases in the price of food and energy, which the Fed cannot control. However, this hasn't stopped critics from accusing the central bank of being woefully behind the curve when it comes to rates.

After Russia cut gas supplies to Europe through the Nord Stream 1 pipeline, fears of a European recession escalated. The euro edged up 0.3% to $1.0144, its biggest gain over two weeks. As long as gas prices remain this high, the EUR will struggle to rise.

As year-over-year core inflation hit 4.9% in June, exceeding the Reserve Bank of Australia's target, the Australian dollar dropped 0.2% to $0.6926. Still, investors discounted rate hike expectations because the figure did not reach the highs some feared. Markets are now pricing in an 86% chance of a 50 bps rate hike next week and a 14% chance of a more modest 25 bps rate increase.

Events of today

On the data front, investors will be closely watching the core durable goods orders in June, which are expected to fall from 0.7% growth in May to 0.2%. This will be another sign of cooling down economic activities. Also, the rest of the housing data will come out this afternoon, with pending home sales in focus. Compared to May, this report is expected to show a 1.5% decline in pending home sales in June.

The Fed rate decision and FOMC statement, which are the week's most anticipated events, will be announced later in the session.