Europe markets deflate before Fed decision

European equities retreated yesterday as investors tread cautiously ahead of a key US Federal Reserve meeting which is expected to result in a rate increase.Wall Street also slipped a touch as markets tried to guess what the Fed will say about the outlook for the US economy, and the size and timing of any further rate hikes.London drifted 0.3% lower while Frankfurt shed 0.4% and Paris 0.7% on the day.All eyes will be on Fed boss Janet Yellen’s post-meeting press conference, with investors hoping for clues on future policy in the wake of President-elect Donald Trump’s surprise election victory.“The outcome of today’s Federal Reserve meeting is likely even more certain than it was this time last year, with the markets pricing in a rate hike,” Spreadex analyst Connor Campbell told AFP.“In light of this, investors’ focus this evening may be more on any hints for the Fed’s path in 2017 than the actions taken today.“On the other hand, if Yellen and co.do not raise rates, things may well go bananas,” Campbell added.Fawad Razaqzada, market analyst at Forex.com, agreed, saying that the dollar would “absolutely tank” if the Fed holds fire.But if Yellen gives an upbeat outlook on the US economy, the US currency may well surge, possibly testing the key 1.05 level against the euro, he said.The dollar softened against other major currencies in the run-up to the Fed’s announcement.In the second half of 2016, increasingly rosy economic data on the health of the world’s largest economy has helped sway reluctant policymakers towards raising rates.In December last year, the Fed had increased its benchmark federal funds rate for the first time in more than nine years from near zero to a still ultra-low 0.25-0.50%.“The US economy is ready, stock markets are ready, and the Fed has to start its rate-hiking cycle some time — no time like the present,” said City Index analyst Kathleen Brooks.Global equities and the dollar have rallied in the five weeks since Donald Trump won the US election, with traders betting his plans for big spending, tax cuts and deregulation will fan already healthy economic growth.Expectations that this will in turn light a fire under inflation has led to speculation the Fed will be forced to embark on a more aggressive programme of rate hikes than previously thought.In London, the FTSE 100 down 0.3% to 6,949.19 points; Frankfurt — DAX 30 down 0.4% to 11,244.84 points and Paris — CAC 40 down 0.7% to 4,769.24 points at the close yesterday.