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Markets see Fed holding rates Wednesday despite lingering July hike risk

Markets see Fed holding rates Wednesday despite lingering July hike risk

The dollar stayed near a one-month high as traders weighed a still-meaningful chance of a Federal Reserve rate increase this week, while lower oil prices and a packed central-bank calendar kept broader markets cautious.

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Fact Check
Every component of the claim is corroborated. Reuters' July 14 report ('Dollar slips after soft US inflation data') states verbatim that odds of a July rate increase fell to 16% from 42% after the inflation data. Reuters' June CPI report confirms headline inflation at 3.5% y/y, matching 'inflation stayed near 3.5%.' The BeInCrypto/cryptorank article confirms markets/economists expect the Fed to hold at the Wednesday (July 29) meeting while futures still priced a meaningful minority (36%) betting on a quarter-point hike, matching 'a meaningful minority still pricing a quarter-point increase.' The slight numeric evolution (16% at July 14 rising toward 36% by July 26) is consistent with the claim's phrasing that futures 'later' showed a minority still pricing a hike.
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Summary

Investors still broadly expect the Federal Reserve to leave interest rates unchanged at its July 28-29 meeting, but the risk of a surprise quarter-point increase remains elevated and continues to support the U.S. dollar. The dollar index was last at 101.55 on Tuesday, near a one-month high, while CME FedWatch showed a 36.3% chance of a 25-basis-point hike this week, up from 16% a week earlier, and an 81% chance of a move by September. The latest pricing broadly aligns with earlier market signals that a hold remains the base case even as expectations for tighter policy have risen. Citadel Securities has argued markets may be underestimating a hawkish shift and expects a quarter-point increase on Wednesday, saying an earlier move could have a larger impact on inflation expectations and broader financial conditions than waiting until September. Oil prices fell after the U.S. halted attacks on Iran, easing some inflation concerns, but Treasury yields retreated only modestly, helping keep the dollar supported. Investors are also watching U.S. second-quarter GDP data and core PCE inflation for further clues on the economy and the Fed's next steps. Elsewhere, the Bank of England and Bank of Japan are widely expected to keep rates unchanged later this week. With the yen still near last week's 40-year lows against the dollar, traders are looking for whether the BOJ maintains a hawkish tone even without changing policy. In digital assets, bitcoin fell 1.88% to $63,694.59 and ether declined 2.83% to $1,890.30.

Terms & Concepts
  • basis point: One one-hundredth of a percentage point, commonly used to describe changes in interest rates.
  • core PCE inflation: A U.S. inflation measure that excludes food and energy and is closely watched by the Federal Reserve.
  • FedWatch: A CME tool that estimates market-implied probabilities for future Federal Reserve interest-rate decisions.