Sterling rose in European trade on Wednesday against a basket of major rivals, extending gains for the seventh straight session against euro and scaling a three-week high on concerns about a widening interest rate gap between the UK and Europe.

Investors still expect Bank of England to raise interest rates by 25 basis points this year while the ECB will likely hold rates unchanged this year.

EUR/GBP

EUR/GBP fell over 0.15% to 0.8622, the lowest since September 20, with a session-high at 0.8643, after rising 0.1% yesterday, the sixth profit in a row, and the longest such streak of daily gains since February. 

Interest Rate Gap

The current interest rate gap between the UK and Europe stands at 75 basis points, the lowest since March 2022, however it'll likely rise to 100 basis points before the year end. 

That's especially so if the inflation and wages data released next week in the UK carried positive surprises, which would bolster Bank of England's chances of another interest rate hike. 

Conversely, the European Central Bank has reliably reached a peak with interest rates in September and will likely abstain from further policy tightening. 

The EU economy faces increased struggles due to the neighboring war in Ukraine, which could prompt the ECB to cut interest rates faster than the BoE next year. 

Dollar fell in European trade on Wednesday on track for the sixth straight loss, plumbing two-week lows following bearish remarks by Fed officials.

Such remarks hurt chances of another US 0.25% interest rate hike before the year end, while investors await US producer prices and the Fed's last meeting minutes to gather more clues about the future of monetary policies.

The Index

The dollar index fell over 0.1% to 105.61, the lowest since September 29, after closing down 0.3% yesterday, the fifth loss in a row, and the longest such streak of daily losses since July. 

Fed Remarks 

Dallas Fed President Lorry Logan said that it's crucial for tight monetary conditions to remain until inflation is brought back to 2%, noting that the labor sector remains very strong.

Fed Deputy Chair Philip Jefferson said the Fed will need to move cautiously due to the recent surge in treasury yields.

Minneapolis Fed President Neil Kashkari said that higher yields could force the Fed to reduce its monetary tightening interventions.

San Francisco Fed President Mary Dale that that tighter financial conditions mean the Fed doesn't have to carry out more deliberate decisions.

US Rates

Following such remarks, odds for a 0.25% Fed interest rate hike at the November meeting stood at 15%, while odds for such a hike in December fell to 29%.

Fresh Pricing

Now investors await important US producer prices data later today to gauge the state of current inflation. 

The Federal Reserve will also release the minutes of its last September policy meeting, at which policymakers held rates unchanged as they continue to monitor conditions. 

Global financial markets await the Federal Reserve's meeting minutes later today to gather more clues on the likely path ahead for US monetary policies.

The Fed paused its policy tightening last month in September, while hinting strongly back then at another 0.25% interest rate hike before the year end. 

A spate of strong US data also bolstered the case for another interest rate hike this year and boosted US treasury yields massively. 

US 10-year treasury yields surged to 16 year high at 4.887%, approaching the 5% barrier.

However, as such yields surged, Fed officials said the Fed might not need to tighten monetary policies once more this year. 

Dallas Fed President Lorry Logan said that it's crucial for tight monetary conditions to remain until inflation is brought back to 2%, noting that the labor sector remains very strong.

Fed Deputy Chair Philip Jefferson said the Fed will need to move cautiously due to the recent surge in treasury yields.

Minneapolis Fed President Neil Kashkari said that higher yields could force the Fed to reduce its monetary tightening interventions.

San Francisco Fed President Mary Dale that that tighter financial conditions mean the Fed doesn't have to carry out more deliberate decisions.

Timing 

The Federal Reserve will release the minutes of its September 19-20 meeting at 18:00 GMT.

Fed Decisions 

The Federal Reserve maintained interest rates unchanged at below 5.5%, already the highest since 2001.

It's a signal for the approaching end of the current policy tightening cycle.

The Fed stated the pause intends to give a longer chance for recent policy decisions to manifest their impact on US data, even as inflation remains stubbornly away from 2%.

The Fed said it'll continue to monitor data closely, especially labor and consumer prices data and global financial developments to determine the best path ahead for policies.

Economic Outlook

The Federal Reserve's economic outlook report released last month included important modifications:

Growth is now revised to 2.1% this year from 1.0% in June forecasts, while 2024 growth forecasts are revised to 1.5%, and 2025 forecasts are revised to 1.8%.

Total inflation forecasts are revised to 3.3% this year, and 2.5% next year, and 2.2% in 2025.

Core inflation forecasts are revise to 3.7% this year, and 2.6% next year, and 2.3% in 2025.

The Fed maintained forecasts for target interest rates at 5.75%, hinting strongly at another interest rate hike this year.

Powell

Fed Chair Jerome Powell said back then, the process of controlling inflation is a long-term one, and interest rates are likely to remain high for an extended duration to bring inflation down.

He added that another interest rate hike won't impact the economy much but will help bring inflation towards the 2% medium target.

Jerome Powell expects inflation to reach the 2% target by the end of 2025, while remaining above 3% this year , adding the Fed is focused mainly on core inflation more than main inflation, which is influenced by volatile energy prices.

US Rates

Current odds for a 0.25% Fed interest rate hike at the November meeting stood at 15%, while odds for such a hike in December fell to 29%.

Euro rose in European trade on Wednesday against US dollar, maintaining gains for the second straight day and almost touching a two-week high as concerns about a widening interest rate gap between the US and Europe fade. 

Recent bearish remarks by Federal Reserve officials hurt chances of another US interest rate hike this year. 

EUR/USD

EUR/USD rose 0.1% to 1.0614, with a session-low at 1.0599, after rising 0.4% on Tuesday, the fourth profit in five days, marking a two-week high at 1.0620. 

Interest Rate Gap

The current interest rate gap between Europe and the US stands at 100 basis points, the lowest since May 2022, and is expected to remain through until next year. 

Both the European Central Bank and the Federal Reserve are now widely expected to maintain interest rates unchanged this year.

Fed Remarks 

Dallas Fed President Lorry Logan said that it's crucial for tight monetary conditions to remain until inflation is brought back to 2%, noting that the labor sector remains very strong.

Fed Deputy Chair Philip Jefferson said the Fed will need to move cautiously due to the recent surge in treasury yields.

Minneapolis Fed President Neil Kashkari said that higher yields could force the Fed to reduce its monetary tightening interventions. 

San Francisco Fed President Mary Dale that that tighter financial conditions mean the Fed doesn't have to carry out more deliberate decisions. 

US Rates

Following such remarks, odds for a 0.25% Fed interest rate hike at the November meeting stood at 15%, while odds for such a hike in December fell to 29%. 

Fed Rates

Now investors await the Federal Reserve's last meeting minutes to gather more clues on the likely path ahead for US monetary policies.