FOMC expected to cut, but by how much?

• Markets struggle for direction.

• UK core CPI highlights likely pause from the BoE.

• FOMC expected to cut, but by how much?

European markets are on somewhat uncertain ground today, as indices struggle for direction ahead of the all-important FOMC interest rate decision this evening. Over two years after the Fed kicked off their tightening cycle with a 25bp hike, today we find out whether they deem in necessary to go over and above with a 50bp cut. The dollar finds itself on the back foot once again in early trade, with growing speculation of a 50bp cut raising speculation that the dollar index will soon find itself into fresh 2024 lows once again.

In Europe, the latest UK inflation report will provide a timely reminder quite why the Bank of England are looking likely to hold off tomorrow, with the core CPI metric jumping to a four-month high of 3.6%. Much like in the US, inflation is essentially a services-led problem, with UK services CPI rising to 5.6% for the month of August. With markets now expecting the BoE to take a more cautious approach to their easing process, it should come as no surprise to see GBPUSD moving sharply higher once again this morning.

Today is all about the Fed, with markets weighing up both what the FOMC might do and also what the reaction might be for stocks. The recent recovery seen throughout equity markets despite the growth in expectations of a 50-basis point cut from the Fed does indicate a growing confidence that such a move might not result in a risk-off move as had previously been the case. The fear that an oversized cut might highlight a concern over the direction of the economy will necessitate a strong and succinct message from the Fed should they opt for a 50bp cut. Nonetheless, with the bank recently shifting back onto a dual mandate that also prioritises the jobs market, there is no doubt that the current risk of a resurgence in unemployment is higher than the potential inflationary impact of taking rates down to 5%. Traders should also keep an eye out for the latest projections from the Fed, with the downward revisions seen to US payrolls since the June meeting expected to bring possible concerning developments in how they see unemployment and GDP going forward.