European shares edged cautiously higher on Tuesday as investors braced for a busy trading week, jampacked with central bank decisions and headlined by the U.S Federal Reserve.

Overnight, Wall Street concluded the session on a positive note despite oscillating between losses and gains, while king dollar very lightly loosened its grip on the FX throne. In the commodity space, gold prices are struggling for direction, waiting for the FOMC meeting but oil seems to be stabilising after experiencing volatility in the previous session on growth and demand concerns.

It’s all about central banks this week with the Fed’s two-day monetary policy meeting beginning today. The US central bank is widely expected to fire another monetary policy bazooka at inflation after the surprise move higher in US CPI last week. On Thursday, the spotlight shines on the Bank of Japan, Bank of England, the Swiss National Bank and Central Bank of Norway who are set to hold their respective policy meetings. These high-risk events have the potential to intensify volatility across currency, commodity, and equity markets.

In the meantime, caution should remain the name of the game with investors finding comfort on the sidelines. As the Fed and other major central banks ramp up efforts to contain inflation, fears around a hard landing for their respective economies could leave market players jittery. The lack of appetite for risk amid growth fears could drain equity bulls further, opening the doors for fresh losses across global stock markets.

Fed expected to fire another monetary missile

The Federal Reserve is widely expected to raise interest rates by 75 basis points for a third straight meeting tomorrow. However, much of the focus will fall on the updated summary of economic projections and Fed Chair Jerome Powell’s post-meeting press conference. Investors will have their magnifying glasses on the “dot plot” for key clues on when and where the Fed’s hiking cycle might be coming to an end. Markets currently see US rates reaching 4% by December 2022 which suggests two smaller 50 basis point rate increases in November and December after a three-quarter point rate rise at Wednesday’s meeting.  Powell’s press conference may provide some insight into this and what we can expect from the Fed over the coming months and 2023.

If the Fed moves ahead with the expected 75-basis point rate rise, this could inject dollar bulls with some fresh energy. But such a move would need to be accompanied by hawkish comments from Powell and a “dot plot” that projects more aggressive rate hikes in the final quarter of this year and potentially into 2023. If the Fed catches markets off guard with a smaller than expected hike, this would hit the dollar hard with a dovish-sounding Powell accelerating the selloff. We expect the dollar to display volatility whatever the outcome of the meeting, with action expected across the FX space.

Currency spotlight – GBPUSD

Last week, GBPUSD tumbled to levels not seen since 1985 as uncertainty over the UK’s economic outlook haunted investor attraction towards the pound. A strong dollar bruised sterling further with prices trading around 1.1430 as of writing. 

On Thursday, the majority of economists surveyed by Bloomberg expect the Bank of England to raise rates by a half-percentage point. Although the annual inflation rate in the UK unexpectedly cooled to 9.9% in August from 10.1%, it’s still at uncomfortably high levels and close to five times higher than the bank’s 2% target.

The pound could receive a short-term boost if the BoE strikes a hawkish tone and signals more big rate hikes down the road. However, upside gains may be capped by growth fears as higher rates result in the UK economy experiencing a hard landing. Alternatively, a dovish-sounding BoE that expresses concerns over the UK economy will most likely drag the already tired pound lower. Talking technicals, GBPUSD is under pressure on the daily charts with the path of least resistance pointing south. A solid weekly close below 1.1400 could encourage bears to attack the downside with last week’s low at 1.1350.

Commodity spotlight – Gold

Gold could be destined for more pain this week thanks to the Fed.

It has been a rough month for the precious metal due to a stronger dollar and rising Treasury yields. After tumbling below the $1700 psychological level last week, it feels like bears have won the battle in September However, the war still rages on with various fundamental forces influencing gold prices.

Looking at price action through a technical lens, gold remains trapped within a short-term range, below key resistance. Sustained weakness below $1680 could open the doors toward levels below $1650 and not seen since early April 2020.