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• The global financial market awaits the Federal Reserve's policy meeting, with a 2/3 probability of a 50 basis point cut in interest rates.
• The dollar has been wavering, while the yen has surged due to the Bank of Japan's decision to hike rates.
• The reaction in the foreign exchange market will be driven by the Fed's tone and the size of the rate cut.
• The outcome of the Fed's meeting and its impact on the global financial market remains to be seen.

The global financial market is currently in a state of anticipation, with all eyes on the Federal Reserve's policy meeting scheduled to begin at 1800 GMT. The meeting is expected to mark the beginning of a U.S. easing cycle, with a 2/3 probability of a 50 basis point cut in interest rates. This would be the first interest rate cut by the Federal Reserve in more than four years, a move that has been priced into the market since July.

The dollar has been wavering in the lead up to this decision, falling along with U.S. yields. The currency currently stands at $1.1119 per euro, not far from the year's low at $1.1201. This depreciation is in anticipation of the U.S. easing at a rapid pace, with more than 100 basis points of rate cuts priced in by Christmas.

In contrast, the yen has been surging, up more than 12% since July. This is due to the Bank of Japan's decision to hike rates at the same time as the Fed prepares to cut. The yen rose about 0.7% to 141.41 per dollar on Wednesday, recouping part of an overnight drop. The yen was also up 0.6% to 157.24 per euro.

Global Currency Reactions to Anticipated Fed Decision

The Australian dollar briefly touched a two-week top at $0.6773, while a rise in milk prices supported the New Zealand dollar at $0.6196. However, these moves were tentative, with traders cautious ahead of the Fed's meeting.

The reaction in the foreign exchange market following the Fed's decision will be driven by the Fed's tone and the size of the rate cut. Nathan Swami, head of currency trading at Citi in Singapore, stated, A dovish Fed on a substantial easing path should generally lead to a weaker dollar. However, he also warned that an extremely dovish Fed could end up spooking markets if it seems it anticipates a more ominous downturn in the economy than is expected. In such a scenario, risk-sensitive and emerging market currencies may face headwinds.

In the lead up to the Fed's meeting, U.S. retail sales unexpectedly rose 0.1% in August, against forecasts for a 0.2% contraction. This data, along with the Atlanta Fed's closely-followed GDPNow estimate being raised to 3% from 2.5%, could potentially support a case for a smaller Fed cut.

Market Outlook Amid Global Economic Indicators

China's markets resumed trade on Wednesday after the mid-autumn festival break, with the yuan's trading band fixed at its strongest since January. The currency was steady at 7.0969 per dollar.

Sterling, the best performing G10 currency of the year, held at $1.3158. Its rally has been driven by signs of a steadying economy and sticky inflation. British inflation data is due later in the day, while on Thursday the Bank of England is seen leaving rates on hold at 5%, with a 35% chance of a cut.

Final European inflation figures are also due, however, they are not expected to deviate much from preliminary August figures. Therefore, all eyes will be on the Fed. Analysts at ANZ Bank noted in a client note, With markets wagering on 41bp of cuts, which is a long way from either realistic contender (25bp or 50bp), volatility seems almost assured.

This situation is reminiscent of the 2008 financial crisis when the Federal Reserve had to cut interest rates to near zero to stimulate the economy. However, the current economic landscape is different, with the U.S. economy showing signs of strength, as evidenced by the unexpected rise in retail sales. Therefore, the outcome of the Fed's meeting and its impact on the global financial market remains to be seen.