Imminent US Fed rate hike cycle to jolt London markets this week

Strong signals from the US Federal Reserve that a rate hike cycle is imminent at its latest meeting this week could jolt London’s financial markets.

The Fed’s Federal Open Market Committee (FOMC), its group of rate setters, are expected on Wednesday to hint that a series rate rises will start in March.

The world’s most influential central bank has adopted a hawkish tilt in recent months in a bid to demonstrate it is serious about tamping down on runaway inflation in the US.

The cost of living across the pond is currently running at seven per cent, the highest rate since 1982.

Confirmation that the Fed is set to tighten policy sharply this year will likely weigh on London markets. Higher rates make fixed income assets more attractive to traders and knock equity prices by reducing the value of companies’ future income streams.

“The FOMC is likely to use its January meeting next week to hint at a March liftoff and to begin formulating a plan for balance sheet reduction,” analysts at Goldman Sachs said.

Further signs of whether the UK economy largely shrugged off the impact of the Omicron variant will emerge when IHS Markit’s latest purchasing managers’ index is published tomorrow.

Meanwhile, fresh data from the Office for National Statistics on Tuesday will provide an update on whether a sharp rise in debt servicing costs as a result of soaring inflation has partly eroded Britain’s fiscal strength.

On a largely quiet week for corporate announcements, third quarter results from short haul airline Wizz Air will be closely watched by investors as a barometer for whether economic activity was strong before the emergence of the Omicron strain.

Drinks group Diageo updates markets on Thursday.