All Eyes on the Fed as Markets Rally — But the Real Test Comes Today
Quick Answer: Asian and European markets staged a strong rally on Wednesday as dip buyers returned ahead of the Federal Reserve’s monetary policy decision, with South Korea’s Kospi jumping 5% and European indices storming higher across the board. Oil edged lower on rising US crude inventories despite the Strait of Hormuz remaining effectively blocked. Bitcoin held around $74,000 in a consolidation structure, while gold struggled below $5,000 as dollar strength and higher-for-longer rate expectations weigh.
The war in the Middle East is still escalating. The Strait of Hormuz is still blocked. And yet markets are rallying — because tonight, for a few hours at least, something else has their full attention.
The Federal Reserve’s monetary policy decision, due later this evening, has effectively suspended the geopolitical risk trade that has dominated price action for three weeks. Investors across Asia-Pacific and Europe have been adding to equity exposure not because the conflict has improved, but because the Federal Reserve’s next move on rates now carries more immediate significance for asset prices than another day of strikes on Iranian infrastructure.
Asia Rallies, Europe Follows
The session began in Asia, where buying was broad and decisive. South Korea’s Kospi jumped 5%, led by technology heavyweights amid calls for capital market reform. Japan’s Nikkei added 2.9%, India’s Nifty 50 rose 0.9%, and Hong Kong’s Hang Seng and China’s CSI 300 gained 0.6% and 0.3% respectively. Tencent reported strong quarterly results and reaffirmed heavy investment in AI development — a signal that Asian technology capital allocation remains firmly on track regardless of macro headwinds.
European indices followed suit, with most sectors trading in positive territory through the morning session. Energy stocks lagged slightly as oil prices eased from recent highs — a counterintuitive move given that attacks on Middle East energy infrastructure are intensifying, but one explained by a build in US crude inventories as measured by the American Petroleum Institute. The US Energy Information Administration is due to release its own inventory numbers later today, which will be watched closely for confirmation.
The Fed: Rates Unchanged, But Every Word Matters
Markets ascribe a 1% probability to any change in the Fed Funds rate tonight — the decision itself is not the event. What matters is the FOMC’s quarterly Summary of Economic Projections and the Dot Plot, which will reveal how aggressively members have revised their rate cut expectations in response to oil-driven inflation. In December, the Dot Plot pointed to just one 25 basis point cut this year. Markets didn’t believe it then, pricing in two cuts with the first in June. They are closer to believing it now — with energy price inflation from the Hormuz closure pushing expectations toward a single cut no earlier than December.
The more hawkish fringe of the FOMC has gone further, suggesting the next move may need to be a hike to control inflation as the labour market deteriorates. If tonight’s statement or Jerome Powell’s press conference — his penultimate before retirement in May — signals any movement in that direction, the market reaction will be sharp. The S&P 500 is currently bumping against resistance just above 6,750. A clean break above opens a move toward 6,800. A rejection risks a swift retest of the lows hit earlier this month, below 6,600.
Oil: Subdued But Vulnerable
Front-month WTI is holding within a $90-$100 range — a figure that feels almost restrained given that one fifth of global oil and LNG supply remains cut off by the Hormuz blockade. The current price reflects a market expectation that the war ends and the strait reopens within a month. The US military has stepped up its bombing campaign along the Iranian coastline facing the strait, raising hopes that passage may be restored sooner than the conflict’s trajectory otherwise suggests.
That expectation is fragile. If there is no credible evidence of resolution by the end of March — and Iran has publicly committed to a long war — a significant repricing of oil to the upside becomes the base case rather than the risk scenario. President Trump’s call for European allies to help reopen the strait has been met with silence, with the UK, France, Japan, Norway and Australia all declining to send warships.
Bitcoin Consolidates, Gold Struggles
Bitcoin was trading around $74,000 in early European trade, holding within a zone that has historically behaved as both support and resistance. The daily MACD has crossed above the neutral line, momentum is to the upside, and price action suggests a bottoming structure is forming following the 40% drawdown from October’s all-time high. Key levels: $76,000 as intermediate resistance, $80,000 as the more significant hurdle above, and $71,000 as near-term support — a break below which reopens the February low of $60,000.
Gold is under more pressure. A burst of mid-morning selling pushed prices below $4,960, the lowest level in a month, after multiple failed attempts to break above $5,200 last week. The dynamic working against gold is straightforward: dollar strength driven by safe-haven demand since the Iran conflict began has compressed the gold price, and the expectation of higher-for-longer rates removes the tailwind that drove gold to record highs in January. Unless that combination shifts — which would require either a dovish surprise from the Fed tonight or a meaningful deterioration in the dollar — gold faces headwinds rather than the supportive conditions it enjoyed through most of the past two years.
Tonight’s Fed decision won’t resolve the Middle East. It won’t reopen Hormuz. But it will set the rate backdrop against which European markets navigate the rest of this crisis — and that makes it the most consequential single event of the week.
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