Markets drift higher as Fed, ECB both expected to hold rates this month

Currency markets and equity futures entered a holding pattern on Monday as traders looked ahead to a packed week of central bank decisions and corporate earnings, with the Federal Reserve's July 28-29 policy meeting now the dominant event on the calendar.

Markets Tread Water Ahead of Fed

U.S. stock futures pointed modestly higher in early Monday trading, with Dow Jones futures up 0.14%, S&P 500 futures gaining 0.26%, and Nasdaq 100 futures advancing 0.50%, according to FXStreet. The dollar held steady against major peers, with EUR/USD largely flat near recent levels and USD/JPY hovering around multi-decade highs.reuters+2

The muted moves came after a bruising prior week for equities. The Nasdaq Composite dropped 2.9%, the S&P 500 fell 1.55%, and the Dow Jones lost 0.93%, dragged lower by a semiconductor selloff that sent the VanEck Semiconductor ETF ↘ 0.22% down nearly 9%. Investors are now pivoting to upcoming quarterly reports from Alphabet ↗ 0.22%, Tesla ↗ 0.51%, and Intel ↘ 3.18% for direction.fxstreet

Fed Expected to Hold, but Hawkish Signals Intensify

Rate futures overwhelmingly point to the Fed holding its benchmark rate in the 3.50%-3.75% range at the July meeting, with prediction markets assigning roughly 85% or higher probability to no change. But that consensus masks a building hawkish undercurrent. Interest-rate futures now price in about a 60.7% chance of a hike at the September meeting, fueled by elevated inflation and the U.S.-Iran conflict driving oil prices higher.polymarket+2

Cleveland Fed President Beth Hammack has been among the most vocal advocates for keeping tighter policy on the table. In remarks on July 18, Hammack argued interest rates may need to rise to counter persistent inflation, noting that core PCE likely rose 3.3% in June. "If recent trends continue, it may soon be appropriate to act," Hammack said in earlier comments, according to Reuters. She joins a growing chorus of officials pressing the case under Fed Chairman Kevin Warsh's leadership.dukecountry+1

ECB Also in Wait-and-See Mode

Across the Atlantic, the European Central Bank is widely expected to hold rates steady at its July meeting after raising rates by 25 basis points to 2.25% in June. Two ECB sources told Reuters that a pause is the most likely outcome, barring a fresh surge in energy prices. Markets and economists broadly anticipate the ECB's next move will be another hike in September.reuters+3

The parallel pause from the world's two most influential central banks underscores how persistent inflation — stoked by geopolitical instability in the Middle East — has shifted the monetary policy debate from how fast to cut to whether further tightening is needed.dukecountry+1