This is what markets want to know, is the expected 25 bps rate hike on Wednesday the last hike in the current cycle from the Federal Reserve? Ever since the previous weaker US CPI print on July 12, markets have been turning more positive on risk in anticipation of an eventual turning point from the Fed. However, is that view misplaced? Here is a look at what to expect and, most importantly, what the surprise will be.

What’s expected

At the previous Fed meeting, Jerome Powell and the dot plot firmly pointed to the market to expect two rate hikes. As a result, short-term interest rate markets see a near 100% chance of a 25 bps hike on Wednesday.

However, rates markets think this is the last Fed hike and don’t buy the two-rate hike narrative. Their current pricing is for one more rate hike. So, the Fed will likely affirm its two-rate hike position on Wednesday but it will stress data dependence on the final decision. This could make for some choppy price moves in stocks, USD, and gold over the decision. However, note that Friday is likely to see a more marked reaction as we have the Fed’s preferred measure of inflation out at 1:30 UK time.

Focus is likely to slip to Friday this week

The PCE print is the personal consumption expenditures print that measures the spending on goods and services by the citizens of the United States. Around 2012, the PCE index became the main inflation index used by the Federal Reserve to inform its policy decisions. If we see a big miss there, then the market is likely to embrace the ‘Fed terminal’ rate narrative, and that should support gold prices through August. However, there are lots of unknowns at this stage, and there could be a surprise from the Fed. A dovish surprise from the Fed on Wednesday could send gold and silver sharply higher in line with its seasonal patterns.