Stocks rebound, Fed in focus

After booking mild losses in the previous session, European bourses are rebounding on optimism surrounding the ongoing peace talks and ahead of the Federal Reserve interest rate decision.

• Progress in peace talks lifts risk sentiment, boosting European stocks
• Fed is expected to hike rates for the first time since 2018
• EUR/USD rises for a third straight day on Ukraine optimism

European stocks picked up off session lows yesterday, helped by falling oil prices, which dropped 11% over just two days. Lower oil prices helped calm stagflation fears, overshadowing data showing that Germany's economic confidence fell by the most on record in March. 

The DAX closed 0.09% lower and is set to jump 1.2% on the open. The FTSE fell 0.25% yesterday and is looking to open 1% higher today.

Peace talks between Russia and Ukraine continue, and there appear to be some small rays of hope appearing. Ukraine’s President Volodymyr Zelensky said in a video address that peace talks with Russia sounded more realistic, but more time was needed. This was enough to send the skittish markets higher, boosting demand for risker assets while pulling safe-havens, such as gold lower.

Gold

Gold has fallen 3.5% this week as it continues to pull back from the recent 2070 high. The improving market mood and falling oil prices have pulled the precious metal back towards support at $1915. But where gold goes from here will depend on the Fed.

Fed rate decision

The Fed will announce its interest rate decision later today. Fed Chair Powell as good as announced a 25 basis point rate hike in his testimony before Congress at the start of the month.  This will mark the first interest rate rise in the US since 2018 and come as inflation continue to soar higher. 

CPI inflation is at 7.9% YoY, a 4-decade high, PPI is at 10%, oil prices are up 25% this year, and wage growth is over 5%, but economic growth is expected to slow due to the impact of the war in Ukraine - presenting the Fed with the problem of where to go from here?

Will the Fed prioritise growth or inflation? Raising rates too quickly across the rest of the year could threaten to push the US economy into recession. According to the CNBC’s Fed Survey, the probability of recession in the US over the next 12 months sits at 33%; in Europe, this is 50%, at least giving the Fed a little more leeway. Yet with inflation four times the Fed’s 2% target, the Fed is expected to continue to hike rates. Still, the risk is that the dot plot falls short of the market’s aggressive bets. 

A dovish hike backed with a message of uncertainty could pull the US dollar lower.

FX to watch

EUR/USD is rising for a third straight session, boosted by peace talk optimism and as eyes move to the Fed. A dovish hike could propel the pair back over 1.10, while a hawkish Fed could put an end to what would have been a fleeting euro rebound.

USD/JPY is rising for an 8th straight session on rising risk sentiment and central bank divergence. A break above the five-year high of 118.46 could open the door to 120.