European bourses trade mixed ahead of the Fed announcement

It’s Fed day, and European stocks are looking nervous. Bourses are trading mixed ahead of the Federal Reserve monetary policy announcement later today as investors question whether the Fed will start to indicate a move towards normalising policy.

The Fed is not expected to adjust monetary policy today. However, there are growing expectations that Jerome Powell and company could start to gradually introduce the idea of reining in monetary policy. Given that the ultra-loose policy has helped drive stock markets to record highs, signs of this support being tapered back will inevitably result in a sell-off.

The FTSE is outperforming its European peers, boosted by financials as the UK economy runs hot. UK CPI rose 0.6% MoM in May, up from 0.3% in April and double the 0.3% forecast. Annually inflation jumped to 2.1% in May, up from 1.5% and ahead of the 1.8% expected. Inflation is now above the BoE’s 2% target.

This data comes amid increasing concerns that the UK economy, like the US economy, is overheating as it rebounds strongly from the pandemic crash. The BoE, along with the Fed, have insisted that inflationary pressures will be temporary. The market is less convinced with the pound advancing and financials dominating the FTSE leader board.

Rising banking stocks are overshadowing weakness in the mining sector. Miners trade under pressure after Chinese factory orders, retail sales and investment data all missed forecasts. The soft data raised questions over the economic recovery of the world’s second-largest economy and largest metal consumer.

Looking ahead, US futures are pointing to a mixed start with the Fed in focus. The direction that the market goes from here depends on the Fed and whether it starts to talk about policy normalisation. No mention of tapering could mean fresh record highs later today.

FX – USD subdued ahead of Fed

The US dollar is edging lower in subdued trade as few are sure enough to take on a big position ahead of one of the most hotly-anticipated Fed meetings so far this year. The meeting comes against a backdrop of surging inflation and a rebounding economy, but the labour market is the weaker link.

Prices are rising, but consumer demand and job growth over the past two months have been slow. Should the Fed stick unwaveringly to its supportive stance, the US dollar could fall steeply. Meanwhile, any acknowledgment that taper talk needs to begin, and the greenback could shoot higher, with EUR/USD dropping to around 1.20.

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Sophie Griffiths
Sophie Griffiths is a market analyst with OANDA, focusing on the UK and Europe. With almost 15 years of experience, she brings with her a deep-seated understanding of the financial markets, providing timely and relevant fundamental analysis across a broad range of asset classes.