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Opening Call:

Shares may open mixed in Europe on Wednesday ahead of the Federal Reserve's interest rate decision. In Asia, stock benchmarks were mostly lower; Treasury yields were mixed; the dollar gained slightly; while oil fell and gold advanced.

Equities:

European stocks futures indicate a mixed open on Wednesday, as investors digest company earnings and await the Fed's interest rate decision later in the day.

The market is certain the central bank will increase its policy interest rate by another 25 basis points to a range of 5.25% to 5.50%.

But investors are less sure of whether that will be the last hike of the current cycle, so the Fed's accompanying statement and what Chair Jerome Powell says at his press conference will be the main drivers of bonds, equities and forex around the event.

Equity markets are in "a little bit of a holding period" ahead of the events to come, David Sekera, chief U.S. market strategist at Morningstar said.

Morningstar's base case is that July's 25-basis point hike is the last, while inflation continues to cool over the second half of the year. Rate cuts could occur as early as February, he said.

However, Swissquote Bank cautioned that "there is a great chance that the Fed will spoil your mood if you are among those thinking that this week's rate hike will be the last for this tightening cycle in the U.S."

Still, "with all the major stock indexes up over 5% in the last month, the pressure on investors sitting on the sidelines waiting for a pullback remains very high, so even if there is a pullback on tough Fed talk tomorrow, it will likely be short-lived," noted Louis Navellier, chairman and founder of Navellier & Associates.

Forex:

Dollar was a touch higher ahead of the FOMC decision due later today.

With a 25-basis point rate increase fully baked in, investors will be focusing on the Fed's post-meeting communication.

Bank of America economists said they would look for four key messages in Powell's Q&A: "(1) 2% inflation is still the goal (2) lower inflation desired without undue harm to economy (3) further tightening still likely appropriate (4) data dependence."

Even the messages aren't likely to surprise markets, the BofA economists said.

With European and Japanese central banks set to make rate decisions later this week, "July FOMC is unlikely to be a major trend-setting event for USD. ECB & BoJ may be larger FX drivers," they said.

Bonds:

Treasury yields were mixed as traders priced in a slightly greater chance that the Federal Reserve will leave interest rates higher for longer next year.

In the U.S., markets priced in a 98.9% probability that the Fed will raise its policy interest rate by 25 basis points to a range of 5.25%-5.5% after the conclusion of its meeting on Wednesday, according to the CME FedWatch Tool.

The chances of another 25-basis-point hike, lifting rates to a range of 5.5%-5.75%, after the September or November meetings were priced at 18.7% and 34.9%, respectively.

"While we anticipate that July will bring the Fed's last rate increase of this cycle, we do not think the Fed is comfortable signaling that shift just yet. Policy makers appear more comfortable maintaining a hawkish stance for now," said TD Securities.

Its base-case view is that the Fed "delivers a 25bp rate hike, and keeps the door open for additional rate increases (consistent with the post-June meeting guidance)."

While the rate-setting Federal Open Market Committee will likely acknowledge recent progress on inflation, "it will also avoid taking a victory lap just yet."

Energy:

Oil futures declined early Wednesday in a possible technical retreat, as traders await central bank meetings this week that may provide clues on the energy demand outlook.

Oil settled higher overnight as upbeat U.S. consumer-confidence data and China's pledge to issue more economic stimulus boosted sentiment.

ANZ analysts expect signs of tightening supply to remain a key driver of the oil market moving forward, after Russia recently announced production cuts.

"Longer term, the big uncertainty is the global economy and traders will be watching all inflation data as a predictor of interest rates, which in turn should be a leading indicator of economic growth," said Michael Lynch, president of Strategic Energy & Economic Research.

Recently, resilient economic data and hopes for a "less-hawkish Fed in the quarters ahead have supported gains in oil," Sevens Report Research analysts said.

However, "the hard data has begun to show cracks emerging in U.S. domestic demand," with the last two Energy Information Administration reports showing a sharp and sudden slowdown in gasoline supplied, they said.

"The market is going to look at U.S. inventory numbers to see whether they indicate an elevated level of exports, which would indicate how tight Asian markets especially are," Lynch said.

Metals:

Gold futures edged higher in Asia ahead of the Federal Open Market Committee's rate decision later in the global day.

"This could be an explosively volatile week for gold due to the Federal Reserve rate decision and incoming key U.S. economic data," said FXTM.

Bulls are "already lurking in the vicinity," with prices pressing above the sticky $1,960.

Whatever the outcome of the Fed decision, "it is likely to rock zero-yielding gold on Wednesday," it said.

Any sign that the central bank is planning further hikes beyond July -- perhaps another move at its September meeting, or later -- could weigh on gold prices, which have benefited from the latest batch of inflation data showing price pressures easing more quickly than expected.

"The downside risk to gold as we wrap up July will be whether the Fed leaves the door somewhat open for further increases to US interest rates, " Jameel Ahmad, chief analyst at Dubai-based brokerage GTC said.

It would be "wise to keep a close eye" on the key U.S. Q2 GDP, initial jobless claims, durable goods and June PCE data in the second half of the week, FXTM said.

"When factoring in how these key releases may impact Fed hike expectations beyond July's policy meeting, this could translate to heightened volatility for gold," it added.

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Copper fell in a possible technical correction following the base metal's rally since Monday when China's Politburo meeting pledged more policy support for the country's economy.

The meeting's statement seems to have triggered some optimism in the markets, but it stopped short of disclosing any large-scale stimulus package that could offer a substantial boost to demand for base metals, ANZ Research analysts said.

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Chinese iron-ore prices were higher, extending gains after Beijing signaled stronger-than-expected policy support at its latest Politburo meeting.

Galaxy Futures analysts said officials' emphasis on boosting domestic demand and their pledge to ease property market policies when the time is right were positive factors for iron ore, as such measures could significantly boost demand for the steelmaking material in the coming months.

But they warned of potential downward pressure in the long term from rising iron-ore supplies overseas.


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07-26-23 0015ET