Federal Reserve policymakers are expected to deliver the biggest US interest rate hike in decades

Key highlights

Federal Reserve policymakers are expected to deliver the biggest U.S. interest-rate hike in decades, along with forecasts for heftier rate hikes this year, their best guesses for how quickly inflation could subside, and at what cost to jobs. Fed watchers expect a rate hike of 0.75 percentage point, the first such increase since 1994.

The Bank of Japan's resolve to defend its yield cap faces attack from investors betting the central bank could give in to global market forces, opening up a slim chance for a near-term tweak in its policy. While few expect the bank to make a change on Friday to its policy of yield curve control, which guides the yield on the 10-year Japanese government bond around 0%, sharp falls in the yen currency are making some lawmakers anxious.

European Central Bank's policymakers were holding a rare, unscheduled meeting today to discuss a blowout in borrowing costs for some euro zone nations, fanning speculation the bank may be gearing to act to calm markets. Yields of bonds issued by Italy and other debt-laden nations have risen sharply since the ECB flagged a series of rate hikes last Thursday and wound down a debt-buying programme in the face of soaring inflation.

USD/INR movement

The USDINR pair made an opening at 77.9850 and traded within the range of 77.98-78.08. The pair closed the day at 78.07 levels. The persistent foreign fund outflows, strong dollar and elevated crude oil prices continued to weigh on investor sentiments. Federal Reserve policymakers are expected to deliver the biggest U.S. interest-rate hike in decades. A lot would depend on the dot plot and inflation projections as it would reveal where the Fed members see the terminal Fed funds rate. Fed Chair Powell's tone in the post policy press conference will be crucial. If the Fed indicates that it is willing to go all out to tame inflation, Dollar strength may continue. The bar though for the Fed to sound more hawkish than what the market is already expecting is quite high. If the Fed sticks to its earlier stance and delivers only a 50bps hike, it would result in massive unwinding of long Dollar positions and short covering in US treasuries.

Global currency updates

Emergency meeting by ECB has helped the EURUSD pair stabilize its earlier losses. Additionally, ECB President Christine Lagarde is also up for a speech that may support the pair's gain. The GBPUSD pair has turned north and managed to erase a portion of its weekly losses. The renewed dollar weakness ahead of the Federal Reserve's policy announcements fuels the pair's rebound, but Brexit-related jitters could limit the upside in the near term. The USDJPY pair has come off from its highs of 135 and is trading at 134.52. However, the monetary policy divergence between the Fed and the Bank of Japan will continue to weigh on the Japanese currency.

Bond market

U.S. Treasury yields pulled back ahead of the Federal Reserve’s key monetary policy announcement. The yield on the benchmark 10-year Treasury note slid to 3.36%, having notched an 11-year high of 3.498% yesterday. Traders had initially been looking for a 50 bps interest rate hike, but in light of the red hot inflation print, the market is now pricing a more than 95% chance of a 75 bps increase, the biggest since 1994, according to the CME Group’s FedWatch tool. Domestic bond market traded almost sideways as India 10-Year Bond yield closed the day at 7.592%.

Equity market

Indian equity benchmarks Sensex and Nifty 50 switched between gains and losses and closed with a cut today, amid a mixed trend across global markets as investors awaited the outcome of a key Fed meeting. Sensex and Nifty 50 fail to hold on to gains and closed the day in red with a loss of -0.29% and -0.25% respectively. Losses in IT, consumer durable, metal and realty shares pulled the headline indices lower, though gains in auto and pharma stocks kept the downside in check.

Evening sunshine

"Focus to be on the US Fed Interest Rate Decision."

US Stock futures rose ahead of the Federal Reserve’s decision on interest rates, while European markets advanced after the European Central Bank called a meeting to address bond-market disruption. The Federal Open Market Committee will conclude its two-day meeting on Wednesday, and is expected to take aggressive action on interest rates in a bid to rein in inflation.