ince Donald Trump’s shock election victory in November investors have become increasingly confident that the Fed will increase its main rate this month. The labour market continues to go from strength to strength, while headline inflation in the US is now approaching its 2% target for the first time since 2014. Economic news in general in the US since October has been overwhelmingly bullish.

While a hike is typically positive for the US Dollar, the fact that the market has fully priced in the chance of a rate increase means that the greenback will likely be driven by the Fed’s ‘dot plot’, where members outline their expectation for the path of future interest rates. We expect to see the first upward revision in such path in years, and therefore we think the meeting will provide further impulse to the US Dollar rally against its major G10 peers.

However, we think a strong signal from Yellen for a long pause in the tightening cycle could see the US Dollar weaken this evening and allow the Euro to retrace much of its post-ECB meeting losses. An unchanged, or downwardly revised ‘dot plot’ could also bode ill for the greenback.

On Tuesday, the Pound lost steam during afternoon trading, having rallied against the US Dollar and Euro following the release of an impressive set of inflation figures. Headline inflation increased to 1.2%, its highest level in two years as the effect of a weaker currency begins to filter its way through to higher prices.

Sterling traders will turn their attention to the release of the latest labour report this morning, including the monthly unemployment and earnings data from ONS. Unemployment and earnings including bonuses are both expected to remain unchanged at 4.8% and 2.3% respectively.

Major currencies in detail

GBP

The Pound slipped yesterday afternoon to finish just 0.1% higher against the greenback.

Yesterday’s inflation report was broadly impressive, with the core measure also increasing back up to 1.4% in November. Inflation is expected to return to the Bank of England’s inflation target next year on the back of a weaker Pound.

The UK currency also took some heart from comments from Philip Hammond late on Monday who voiced his support behind a staggered transition period for the UK’s EU exit.

The latest labour data will be the main economic release in the UK today. BoE Governor Mark Carney will also be speaking this afternoon, although is not expected to touch on monetary policy ahead of tomorrow’s central bank meeting.

EUR

Investors in Europe remained in a cautious mood on Tuesday and the Euro traded within a narrow band, ending unchanged versus the US Dollar.

The latest economic sentiment surveys from ZEW were, on the whole, impressive yesterday. The index representing sentiment for the wider Eurozone increased to 18.1 this month from 15.8 recorded in November, its highest level in 6 months. However, confidence remains subdued and comfortably lower than last year as concerns over Britain’s EU exit and the Italian banking system continue to weigh on confidence.

Industrial production is forecast to print almost flat for October when released this morning. The main focus for the Euro will, however, undoubtedly be this evening’s Fed meeting.

USD

Markets were relatively calm in the US ahead of tonight’s Fed announcement. The US Dollar was little changed, ending 0.1% lower against its major peers.

News out of the US was light on the ground on Tuesday, with investors mostly overlooking the second tier data. Small business optimism increased more than expected in November. Optimism jumped to 98.4 from 94.9, its largest increase since 2009, on the back of Donald Trump’s pledges to cut corporation tax in the US next when his presidency begins in early 2017.

Before tonight’s Fed announcement, retail sales are expected to show a modest slowdown on a month previous. The Fed’s rate decision will be announced at 19:00 UK time followed by Yellen’s press conference 30 minutes after.