United States pre-open: Stocks set to drop after hawkish Fed

Stocks rose on Wednesday, but worries about stretched valuations and caution before a near-certain rate hike by the U.S. Federal Reserve kept their gains in check, while the dollar steadied against a basket of major currencies.

The Dollar index, a measure of the value of the U.S. dollar relative to a basket of foreign currencies, fell 0.10 percent to settle at 97.33.

The Japanese yen is down by 0.6% at 110.19 per dollar.

The US Dollar plunged following the news as investors grew concerned that the Fed may downgrade its US interest rate hike outlook.

"Overall, the latest announcement tilts toward the hawkish side and we are surprised market reaction is not reflecting this with a larger magnitude of price change", commented Allianz Investment Management's Charlie Ripley. The core CPI increased 1.7 percent year-on-year, the smallest rise since May 2015, after advancing 1.9 percent in April.

The British pound weakened 0.4% to $1.2698 and the euro retreated 0.5% to $1.1165.

The yield on the two-year Treasury note, which is more sensitive to Fed policy moves, declined 3.6 basis points to 1.319%. They fell as low as 2.103 percent following the downbeat data, their lowest since November 10. The Fed also laid out plans to pare back its $4 trillion balance sheet this year.

Economists polled by Reuters overwhelmingly see the usa central bank hiking its benchmark rate to a target range of 1.00 to 1.25 percent this week, though expectations for further rate increases are fading. The vote's composition had been expected to be 7 to 1 in favor of a hold.

A Reuters poll of 21 of the 23 primary dealers that do business directly with the Fed showed 14 of them now believed it would announce the start of its balance sheet normalisation at its September 19-20 policy meeting.

In lifting its benchmark lending rate by a quarter percentage point to a target range of 1.00 percent to 1.25 percent and forecasting one more hike this year, the Fed seemed to largely brush off a recent run of mixed economic data. The rest of them said it would make such a move at its December 12-13 meeting.

"Investors believe that it is going to take the Fed some time to confirm that inflation is strong enough to raise rates again, and in the meantime, the Fed is going to start reducing its balance sheet at a gradual pace", said Kumiko Ishikawa, FX market analyst at Sony Financial Holdings in Tokyo.

At the same time, the world's most important central bank also normalized money printing - a policy instrument that nearly a decade ago was introduced as an extraordinary, emergency, one-off response to the huge credit crunch that threatened to engulf the world economy.

It "is so mild and mechanical that it shouldn't be an issue for the longer-dated Treasury or MBS markets", said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin. The dollar index was little changed on Thursday after having slid to as low as 96.323 on Wednesday, having shed almost 6 percent on the year, before bouncing back a tad on the Fed's policy tightening.

Commodity-linked currencies such as the Australian Dollar, New Zealand Dollar and Canadian dollars, also pared gains against the US currency after touching multi-month highs following the release of USA data.

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