Fed Hike Looms as Global Markets Bracing for Surprise Decision

The Federal Reserve meeting is expected to shake sentiment in global markets, regardless of whether it decides to hike interest rates or hold steady. According to ING Think, there's a 30% probability of a rate hike, which would likely have significant implications for the EUR and GBP markets.

The Fed's decision will also impact oil prices and inflation expectations, as higher real rates have contributed around 50bp to nominal 2Y swap rates over the past months. A hawkish turn by the Fed has already led to higher real rates elsewhere, with a recent increase in the 10y Bund auction.

ING Think notes that market sentiment is currently positive on the economic outlook, allowing European rate markets to permit even more hawkish positioning. However, if the Fed does decide to hike rates, risk assets may suffer from tighter financial conditions, leading to a potential hit to market sentiment.