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A look at the day ahead in U.S. and global markets from Dhara Ranasinghe

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A day after the Federal Reserve took markets by surprise with a hawkish message, it’s the European Central Bank’s turn in the hot seat.

Short-dated government bond yields in the United States and Europe are heading back up and bullish stock markets are starting to feel, well a little bit less bullish.

While the Fed was widely expected to, and did, keep rates unchanged, the U.S. central bank left the door open to more increases ahead.

Analysts at BNY Mellon noted that Fed projections – both the projected level of the funds rate and the sheer number of members that saw higher rates – was much more hawkish than expected.

The headquarters of the European Central Bank (ECB) are pictured in Frankfurt, Germany, July 8, 2020. REUTERS/Ralph Orlowski

And so to the ECB, which is all but certain to raise borrowing costs to their highest level in 22 years on Thursday.

It’s also tipped to leave the door open to more hikes, extending its fight against high inflation even as the euro zone economy flags.

For markets, which had been hopeful, that rate hikes would soon pave the way for a pause in rate increases and then easing later this year as growth slows, disappointment is sure to follow.

Or perhaps not? Even after the more hawkish message from the Fed on Wednesday, market pricing for the rate trajectory has not changed too much.

Money markets price in roughly one more 25 basis point rate increase from the Fed, while the ECB may struggle to sound hawkish while inflation in the bloc is coming down.

Perhaps that helps explain why the euro has edged off one-month peaks hit on Wednesday near $1.0865.

 ING analysts reckon the euro/dollar exchange rate now faces some “moderate downside risks.”