FOMC Uncertainty Reigns as Hawkish Bias Takes Hold

The Federal Reserve's upcoming meeting has sparked uncertainty among traders and investors, with odds of a rate hike at 35-40% as of Tuesday. The market is leaning towards a hawkish outcome, which could lead to a stronger US dollar.

However, the Fed's decision to avoid providing forward guidance on its future moves adds an extra layer of complexity. Even if the Fed skips a hike this week, the market may still assume that one is coming at the September meeting.

The reaction function could be significant, with the market interpreting every hint from the Fed as a signal for its next move. A rate hike would initially be seen as a hawkish surprise, while a pass on raising rates would reduce expectations for future hikes.

In other markets, the Bank of Japan is not expected to hike interest rates this week, but there's a 30% chance of a September hike. The front end of Japan's government bond yield curve has perked up recently, and a further tightening could be priced in by mid-December.