Fed expected to stay on hold – for now

Rising oil prices and higher US bond yields overnight are supporting the dollar, which continues to advance ahead of the Fed’s interest rate announcement later today. It is trading at around $1.1125 against the euro and just below $1.33 against sterling, taking its gains versus both to around a cent since the start of the week, which leaves EURGBP little changed at around £0.8370 this morning. The market sees little chance of a rate hike at today’s Fed meeting, though it is almost fully pricing in a 25bps increase at the final meeting of the year in December. In the UK, the Chancellor of the Exchequer presents his first Budget this afternoon. This is expected to be a cautious enough affair, particularly given elevated government borrowing costs. Reports suggest the Chancellor will offer households and businesses some “breathing space” amid high energy costs, while sticking within the fiscal rules.

Oil prices are moving up again, with Brent crude around $2 a barrel higher at over $115, after the Wall Street Journal reported that the US has warned Gulf countries to prepare for a possible short, intense military campaign against Iran following the mid-term elections. US bond yields have edged higher overnight – the benchmark 10-year yield is back above 5% – while UK and German yields are following suit at the start of play today. French yield spreads are largely steady, having narrowed a good bit in Monday’s trading. Equity markets had another fairly positive session with the S&P 500 and the Stoxx Europe 600 both gaining around half a percent. Asian markets were generally in the black overnight, though European indices have opened slightly lower this morning.

The latest ECB Bank Lending Survey (BLS) reports a “further tightening of credit standards for loans to firms and consumer credit, owing to higher risks,” the latter partly related to geopolitical uncertainty and energy developments. It also reports “a decline in loan demand across all segments, driven mainly by higher interest rates,” although there is a “gradual but sustained increase in demand for loans to finance AI infrastructure.”

For the day ahead, as well as the UK Budget and the Fed meeting, the Bank of Canada announces its latest interest rate decision with the market pricing in a very high chance of a 25bps hike (to 2.5%). It is very quiet in terms of economic data with the trade balance for September in the US the only release of note.