Markets cautious ahead of central bank decisions

Investors will likely remain cautious ahead of a week packed with key data and policy decisions from major central banks.

Asian shares declined on Tuesday as concerns about the Chinese property sector hit risk appetite. This negative sentiment, coupled with overall caution was reflected in European markets this morning. In the currency space, the dollar is drawing some support from the tense mood while in the commodity arena, Brent touched $95 and gold retreated from a two-week high.

Fed decision in focus

The Federal Reserve is widely expected to leave interest rates unchanged at 5.25 - 5.50% at this week’s meeting. However, much focus will be on what clues the economic projections, dot plots, and Jerome Powell's press conference offer on future rate hikes. The key question is whether the updated dot plot will still forecast one more 25-basis point rate hike this year. As of writing, traders are currently pricing in a 32% probability of a 25-basis point hike by November with this jumping to 47% by December.

Currency spotlight – GBP/USD

It could be especially volatile for GBPUSD which has to contend with the Fed/UK CPI/BoE combo over the space of 30 hours.

The day before the BoE decision, the latest UK inflation figures will be published with economists forecasting CPI to rise 7.0%, up from the July print of 6.8%. Core inflation is projected to cool 6.8% year-on-year, down from 6.9% in the previous month.

Markets widely expect the BoE to raise interest rates by 25-basis points, marking the 15th straight hike and taking the key rate to 5.5%. The main question is whether this will be the final rate hike as policymakers weigh sticky inflation against stagnant economic growth.

Talking technicals, GBPUSD remains under pressure on the daily charts with 1.2430 acting as a key level of interest.