Yen benefits from caution before Fed meeting

Investors were generally cautious before the Federal Reserve meeting on Wednesday, boosting the yen, as the rally that pushed up shares after Chinese and U.S. economic data in the previous session slowed in early London trading. Risk appetite was limited ahead of the U.S. Federal Reserve's policy meeting, and its statement at 1800 GMT.

European shares were mixed at the opening, but then rose, with the Stoxx 600 up around 0.3%, pushed up by gains in retail stocks. The MSCI world equity index, which tracks shares in 49 countries, was up 0.2%, while MSCI's main European Index was up 0.3%.The Fed is not expected to make changes to its monetary policy at the meeting, which will be its first since it announced that it would pursue average inflation targeting.

Although the economic projections are expected to be somewhat improved from the last round of forecasts in June, Fed Chair Jerome Powell is expected to stick to his message that the road to recovery will be long and uncertain. "While acknowledging the more rapid improvement in the economic backdrop, we expect the message to remain one of caution," wrote RBC Capital Markets analysts in a note to clients.

"There is no upside for the committee to be positive at this juncture." Investors will also be watching for U.S. retail sales data, due at 1230 GMT, which is expected to show a robust increase. London's FTSE 100 lagged other European indexes, down 0.4%, and the pound was down against the euro, weighed down by fears of a disorderly departure from the EU single market.

UK inflation dropped to its lowest rate in almost five years last month, led by a large reduction in meal prices. "We've already started to see the early signs of the unemployment rate starting to edge higher, and with the furlough coming to an end next month and already being tapered, this deflationary wave is likely to get worse in the short term," wrote Michael Hewson, chief market analyst at CMC Markets UK. The yen hit a two-week high of 105.250 to the U.S. dollar overnight, as investors sought safer assets, and it held close to these levels at 105.325 at 0726 GMT. Against a basket of currencies, the dollar was a touch weaker, down 0.1% at 93.005 at 0740 GMT. The euro was up 0.1% at $1.18595. High-rated eurozone government debt was little changed, with the benchmark German 10-year Bund yield at - 0.483%.Oil prices rose for a second day in a row, with U.S. crude oil hitting one week highs, up 2.4% at $39.21 a barrel at 0746 GMT.

Gold prices rose, up 0.5% at $1964.38 an ounce at 0747 GMT. Elsewhere, the World

Trade Organization ruled that the United States had breached global trade rules with the multibillion-dollar tariffs it imposed during its trade war with China. The decision had limited market impact as it is only the start of a legal process that could take years.

Meanwhile, A deepening dollar selloff propped up the British pound on Wednesday, putting it on track for its biggest daily rise in 21/2 weeks before a central bank meeting on Thursday where policymakers may strike a downbeat assessment for the struggling economy. The greenback fell broadly against its rivals as bets grew the U.S. Federal Reserve might hint at more policy action at the conclusion of a meeting. The Fed decision is due at 1800 GMT.

Markets are keen to see the Fed's economic projections, and particularly whether it spells out where it sees inflation headed and what exactly that means for interest rates. "Major currencies are up against the dollar including the pound with the oil price rise also helping," said Kenneth Broux, a strategist at Societe Generale in London. "It seems to be risk on into the Fed."

Leaving aside the pre-Fed policy decision bounce, the odds are stacked in favour of further pound weakness. While the Bank of England is widely expected to hold fire, policymakers are likely to conclude that downside risks to the economy are rising for the economy due to rising Brexit uncertainty and renewed restrictions on social activity.

Geoffrey Yu, senior EMEA market strategist at BNY Mellon said the central bank will now have to contend with Brexit and fiscal uncertainty and the pound's recent spell of weakness is warranted. Sterling had its worst week in six months last week, as investors grew more pessimistic about the chances of a Brexit deal being reached before the December 2020 deadline.