US retail sales and Fed's meeting conclusion in focus

During Wednesday's European session, the US dollar climbed ahead of the Federal Reserve's policy announcement after a two-day meeting, which is expected to result in more aggressive monetary tightening. 

The Fed signalled at its meeting in May that half-point increases were very likely at its following two meetings. Still, expectations have been rising in the wake of Friday's red-hot US consumer inflation report that it will act even more aggressively this week. Inflation has prompted investors and energy traders to expect the Fed to raise interest rates this week by 75 basis points - the most significant US interest rate hike in 28 years.

On the opposite to the Fed, the yen will weaken further against the dollar for at least the rest of 2022, reflecting the impact of the Bank of Japan keeping its policies easy as the only major central bank. This Friday, the Bank of Japan will hold its latest policy meeting and face the dilemma of supporting its currency and boosting a struggling economy simultaneously.

In a meeting later Wednesday, the European Central Bank's Governing Council will discuss the recent sell-off in government bond markets. After the ECB announced that it intends to start raising interest rates in July, the spread between German and more indebted southern nations, such as Italy, soared to their highest level in two years, putting more pressure on the vulnerable economies in the green continent.

Events for today

Eurozone economic data Wednesday will be dominated by French inflation data, where consumer prices are expected to rise 0.6% in the month and 5.2% year-over-year.

In earlier trading, China's industrial production rose 0.7% in May from a year earlier after falling 2.9% in April, indicating that the economy is on the mend.

Following the announcement of the FOMC's decision, Chairman Powell will hold a press conference. If the Fed raises rates by at least half a point, he may face questions about the future pace of rate hikes. It will be important to pay attention to the data the Fed releases that shows what other policymakers are thinking about the pace of tightening this year.

Data on US retail sales for May is expected out later today, with the expectations of a 0.2% monthly increase, down from April's 0.9% increase.

According to data from the American Petroleum Institute, US crude inventories increased by 736,000 barrels last week. However, gasoline stocks dropped by 2.2 million barrels, suggesting demand from US drivers remained strong despite record prices. US Energy Information Administration data will be revealed later in the session. It will provide further clues on how tight energy supplies are in the world's largest consumer.