Fed decision in focus

Preview: With oil north of US$100 and bond yields elevated, all eyes will be on today’s Fed decision.

The day that is: UK inflation and Fed announcement on deck

We have a busy docket ahead today, kicking off with the UK August CPI inflation report at 6 am GMT and the widely anticipated Fed rate decision at 6 pm.

Fed rate hike on the table – SEP also in focus

Starting with the most important, the Fed decision. Heading into the event, data showed a rather punchy US August jobs report, which, you will likely recall, triggered a hawkish Fed rate repricing in rates markets. However, the recent US August CPI print mattered more, though this was largely in line, except for a modest uptick in MM core, which was clearly enough for investors to add to the hawkish pricing.

Right now, STIR markets have all but fully discounted a 25-bp rate hike today – which would bring the target rate to 3.75-4.00%, while the OIS curve is still pricing in about a 50% chance; this is quite a divergence. The Reuters poll, however, is aligning more with the futures market, with 86 of 101 economists expecting the Fed to raise rates. So, whether we get a hike or hold today, the decision alone could immediately elevate volatility across key asset classes.

We will also receive the updated economic projections, and these will be important – often referred to as the ‘SEP’. In the June projection for the Fed funds rate, the central bank expected only one more rate hike by year-end. Both futures and OIS, however, are pricing in two rate hikes by the end of the year.

So, if the Fed hikes rates today but leaves the 2026 projection at 3.8%, this would be a dovish hike, and this would likely trigger an unwind of Fed rate-hike bets, sending yields and the USD sharply lower, and equities as well as gold northbound. However, this, coupled with a hold decision, would add notable fuel to this move. Even if the Fed also revises 2027 up to 3.8%, I would still consider this dovish-leaning, as it suggests that, in the central bank’s view, this is a one-and-done hike.

Conversely, a rate hike, along with the 2026 projection coming in at 4%, would not necessarily surprise markets, as that is what is priced. However, it would signal that the Fed ‘means business’, and a rise in yields and the USD could materialise on the back of this. Of course, anything north of 4% would exacerbate upside in yields and the USD.

UK inflation lands ahead of BoE rate decision

The UK inflation report will be released a day ahead of the BoE rate decision, where, as of writing, investors are assigning a 65% chance of a hold versus a 35% probability of a rate hike (from a 90% [10%] hold [hike] call just a week ago). Consequently, the inflation print is important, as meaningful deviations today could swing the MPC vote split.

I also think it's imperative to note that markets have priced in a chunk of hawkish risk further out on the curve in just one week: The November meeting rate hike bets increased from 50% to 70%, and the December meeting now has a 90% probability of a rate increase, up from 60%.   

Economists’ expectations indicate that YY headline inflation reached 3.1% (energy-driven), up from 2.9% in July (max/min est. range between 3.3% and 2.8%), while YY core inflation is anticipated to remain at 2.6% (max/min est. range between 2.8% and 2.5%), and services inflation is forecast to rise to 3.5% from 3.4% (max/min est. range between 3.8% and 3.3%).

Given the hawkish BoE rate repricing, a broad miss in these data today could trigger an unwind across the rate curve, likely enough to jolt GBP and Gilt yields lower.

The day that was: Oil and bond yields surge

US equity benchmarks finished another session underwater on Tuesday, weighed down by elevated energy prices and rising bond yields. The Nasdaq 100 fell 0.7%, the Dow dropped 0.6%, and the S&P 500 fell 0.5%, extending a relatively rough couple of days. Overnight, however, Asia-Pac shares are trading modestly positive, with Japan’s Nikkei 225 and Japan’s Topix adding around 0.5% apiece, South Korea’s KOSPI up 1.1%, and Australia’s S&P/ASX 200 up 0.3%.

In fixed income, US Treasuries continued to sell off yesterday, sending the 10-year yield to 5.04% – a move that marks its highest level since mid-2007. This was driven by elevated oil prices – WTI and Brent crude are comfortably north of US$100/barrel due to geopolitical tensions impacting oil supplies – and rising inflation expectations, which have been increasing since the beginning of August, and, of course, the fast-growing US debt concerns.

This kind of move in long-term rates puts direct pressure on equity valuations – particularly for the high-multiple tech names that have carried the market for the past few years – and it remains a big part of why growth stocks underperformed again. 

In the FX space, the USD remained bid against major peers, largely backed by hawkish Fed rate pricing. A daily double-bottom pattern is forming off lows from 98.60. The neckline calls for attention at 99.87; a break here opens the door to resistance at 100.54, followed by the pattern’s profit objective at 101.20. Meanwhile, the USD/JPY continued to push higher and shook hands with ¥155, with resistance at ¥155.54 now also in the crosshairs.