European Stocks Rebound From 3-Month Lows as Markets Brace for Fed Rate Decision

European stock markets posted modest gains on Wednesday, recovering from three-month lows as investors adopted a cautious stance ahead of a pivotal interest rate decision by the U.S. Federal Reserve.

A Tentative Rebound

The pan-European Stoxx 600 Index rose 0.5%, staging a partial recovery after a sharp sell-off on Tuesday pushed the benchmark to its lowest point in three months. The recent market pressure has been attributed to a combination of triple-digit crude oil prices, rising geopolitical risks in the Middle East, and elevated government bond yields.

Major regional bourses also advanced in early trading:

• Germany’s DAX and London’s FTSE 100 each gained 0.4%.
• France’s CAC 40 was up 0.3%.
• Spain’s IBEX 35 and Italy’s FTSE MIB climbed 0.6%.

All Eyes on the Federal Reserve

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Global markets are largely in a holding pattern as the Federal Open Market Committee (FOMC) concludes its two-day policy meeting. According to the CME FedWatch tool, interest rate futures now indicate a 92% probability of a 25-basis-point interest rate increase. This represents a significant shift from just a week ago, driven by persistent U.S. inflation data and Brent crude oil prices holding above $113 a barrel.

A quarter-point hike would be the Fed's first since mid-2023 and would follow a similar move by the European Central Bank, which raised its key deposit rate to 2.50% last week.

Focus Shifts to Forward Guidance

With a 25-basis-point rate hike largely priced into asset markets, investors are now focused on the forward-looking signals from Federal Reserve Chair Kevin Warsh’s post-meeting press conference and the central bank's updated economic projections. Market participants will be scrutinizing the Fed's commentary for clues as to whether this is a one-off adjustment to counter energy-driven inflation or the start of a more prolonged hiking cycle.

The Fed's decision comes amid growing global rate pressures. The Bank of Japan is widely expected to raise its borrowing costs on Friday, while the U.S. 10-year Treasury yield remains near multi-year highs after briefly crossing the 5% threshold on Tuesday.