US Dollar rose in European trade on Thursday against a basket of major rivals for the third straight session, scaling a six-month high as US treasury yields spike to multi-year highs following Fed's meeting.

The Federal Reserve paused interest rates but hinted strongly at another 0.25% rate hike before the year end, while cutting down prospects of a rate cut in 2024. 

The Index

The dollar index rose 0.25% to 105.70, the highest since March, with a session-low at 105.42, after closing up 0.2% yesterday following Fed's meeting.

US Yields 

US 10-year treasury yields spiked over 1.3% today on track for the third meeting in a row, hitting 16-year highs at 4.472% and bolstering investments in dollar. 

The Fed

As expected the Federal Reserve maintained interest rates unchanged at below 5.5%, already the highest since 2001.

It's a signal for the approaching end of the current policy tightening cycle. 

The Fed stated the pause intends to give a longer chance for recent policy decisions to manifest their impact on US data, even as inflation remains stubbornly away from 2%. 

The Fed said it'll continue to monitor data closely, especially labor and consumer prices data and global financial developments to determine the best path ahead for policies. 

Economic Outlook

The Federal Reserve's economic outlook report released yesterday included important modifications: 

Growth is now revised to 2.1% this year from 1.0% in June forecasts, while 2024 growth forecasts are revised to 1.5%, and 2025 forecasts are revised to 1.8%. 

Total inflation forecasts are revised to 3.3% this year, and 2.5% next year, and 2.2% in 2025. 

Core inflation forecasts are revise to 3.7% this year, and 2.6% next year, and 2.3% in 2025. 

The Fed maintained forecasts for target interest rates at  5.75%, hinting strongly at another interest  rate hike this year. 

Powell

Fed Chair Jerome Powell said Wednesday the process of controlling inflation is a long-term one, and interest rates are likely to remain high for an extended duration to bring inflation down. 

He added that another interest  rate hike won't impact the economy much but will help bring inflation towards the 2% medium target.

Jerome Powell expects inflation to reach the 2% target by the end of 2025, while remaining above 3% this year , adding the Fed is focused mainly on core inflation more than main inflation, which is influenced by volatile energy prices.

Bank of England voted to hold interest rates unchanged at 5.25%, the highest since March 2008, confounding expectations of a 0.25% hike to 5.5%.

Such a pause is the first for Bank of England since it launched the current cycle of interestt rate hikes in Decemebr 2021, in turn hurting the pound's tanding.

Global markets await Bank of England's policy meeting later today amid important developments in the UK, including a tumble in inflation to 1-1/5 year lows, showing that the UK economy is falling faster than expected into recession.

The Federal Reserve decided to pause rate hikes this week, with the Swiss National Bank also issuing a similar decision, in turn paving the way for Bank of England to similarly pause interest rate hikes.

We'll try to lay out the possible and likely scenarios for today's policy decisions in Britain.

UK Data

UK consumer prices rose 6.7% y/y in August, the slowest since February 2022, and below forecasts of 7%. 

Core prices rose 6.2% in August, also below estimates of 6.8%

Such a steep decline in consumer prices shows the reduced inflationary pressures on Bank of England and bolsters the case for an end soon to the current cycle of policy tightening.

Timing

The Bank of England will issue its policy decisions on 11:00 GMT, with Governor Andrew Bailey talking later about the decision.

Bailey recently said outright the BOE is likely approaching the end of the rate hike cycle. 

Meeting Scenarios 

The first scenario: pausing interest rate hikes for the first time since December 2021, as the BOE continues to monitor data and conditions. 

This scenario would hammer the pound and bolster expectations of early interest rate cuts in 2024. 

Second Scenario: A surprise new interest rate hike by 25 basis points to 5.5%, the highest since 2008.

Such a hike would almost definitely would be the last this year and won't be followed by a similar one in November, with the BOE clearly hinting at the end of policy tightening. 

The Third scenario entails a rate hike, and strong hints of yet another interest rate hike in November.

This is obviously the most supportive scenario for the pound, however it's a scenario in heavy doubts as the economy faces struggles. 

With its massive oil and gas revenues, there are no major reasons that stop Iraq from becoming a global petrochemicals producer, while reaping major benefits from selling such high-quality products with added value. 

Indeed, there were plans for such projects in Iraq, with the Iraqi government attempting to accelerate steps to found a strong petrochemical industry in the country. 

Shell was to be a major partner in such efforts, which include founding a nuclear plant to support the petrochemical industry, with the project estimated to produce nearly 1.8 million tonnes of various petrochemicals a year.

However, very early on Shell faced several obstacles navigating Iraq's muddled waters and government red tape and corruption, which is a recurrent issue facing all foreign companies in Iraq. 

Indeed, it's been estimated that Iraqi officials got millions of dollars in bribes and corruption related to such oil and petrochemical products in the past few years, harming national efforts and budgets massively. 

Thus the project with Shell has remained suspended since 2015, especially as Shell already withdraw from active development, with the issue of bribes already tainting the project. 

It was estimated that the initial cost of the project would reach $11 billion, however 3 to four billion of which were earmarked to suspect sources, potentially to bribes and facilitation costs and such. 

It's no wonder then that Shell withdrew from the project with the Iraqi government thus seeking a new partner, including Saudi partners. 

Overall, the potential remains massive for developing a strong petrochemicals industry in Iraq, with Russian companies looking into potentially investing into the secret according to recent sources. 

The Russian side intends to completely revamp the project if it indeed took over, with the use of ethane as the initial material, which is a new direction, as such a usage will help reduce capital investments and complex logistical requirements. 

The fruits of such labor and planning remain to be seen.