In a nutshell:
● Market expects Fed to raise rates by 0.25 percentage points to 0.75-1.0 per cent
● Fed chair Janet Yellen’s press conference will hold clues to next moves
● Dollar softer and US bond yields hold near recent highs ahead of announcement
● Oil prices strive to break six day losing streak, helping lift equity indices
All eyes will be on the US Federal Reserve, which delivers its monetary policy decision at 18:00 GMT on Wednesday.
According to the CME FedWatch tool, the markets sees a 91 per cent chance that the central bank will raise interest rates by 0.25 percentage points to 0.75-1.0 per cent, with signs of continued improvement in the world’s biggest economy allowing the Fed to take only its third traditional step along the path of policy normalisation since the financial crisis.
Given that a move higher in borrowing costs is baked into the market, it is what the Fed says about the likely trajectory of future rate rises that should colour trading later in the day. Chair Janet Yellen will hold a press conference to discuss the central bank’s thinking and in the meantime the market is pricing in a 50/50 chance of another 25bp hike in June.
The US dollar index, which measures the buck against a basket of its peers, and which is hovering just below a 14-year high following earlier bets on tighter Fed policy, is slipping 0.2 per cent to 101.50.
The policy sensitive US 2-year government bond yield, which moves opposite to the price, is barely changed at 1.38 per cent, holding its highest level since June 2009. The 10-year Treasury yield is also little moved on the day at 2.60 per cent, while in contrast the equivalent maturity German Bund is steady at just 0.45 per cent as the European Central Bank remains in monetary easing mode.
What to watch
The polls have opened in the Dutch election and traders are wary that a good showing for anti-EU parties could provide momentum for Marine Le Pen, the far right candidate challenging to become president in the upcoming French plebiscite.
Benchmark 10-year Dutch sovereign bonds are showing little sign of stress, with yhields holding at 0.46 per cent, in line with their German counterparts.
The UK labour market report is due to be released at 09:30 GMT. HSBC thinks the unemployment rate could edge down to 4.7 per cent, which would be the lowest level since 2005.
There is batch of US economic data before the Fed decision. The February retail sales and consumer price reports are set for publication at 12:30 GMT, followed at 14:00 by the NAHB housing market index for March.
The oil market is striving to break a six day losing streak that saw Brent crude prices slump 9.1 per cent amid concerns that Saudi Arabia was not adhering to an Opec production cut deal and that increasing output by US drillers was adding to a glut.
Brent, the international benchmark, is up 1.4 per cent on Wednesday at $51.59 a barrel, while West Texas Intermediate, the main US contract, is advancing 1.4 per cent to $48.40, having at one point on Tuesday hit a three-and-a-half month low of $47.09.
The rally comes after Saudi Arabia’s energy ministry affirmed the country’s commitment to “stabilising the global oil market”, a statement that was rushed out after Opec’s monthly report showed Saudi production increased in February.