European markets on edge before Fed as hot CPI, RBNZ surprise and oil climb add jitters

The day has already turned out to be a busy one as the run of central bank decisions gets underway. Inflation is once again front and centre, with a lot for European traders to weigh up before the main attractions arrive later in the session.

First up, Australia's consumer price data landed above forecasts, with trimmed mean inflation ticking up to 3.7%. RBA Governor Bullock lost no time in saying that price pressures are still "far too high", a clear signal that another hike is looking more likely. Her remarks reinforce the sense that the central bank is wrestling with a steadily more awkward inflation picture.

As a result, traders have boosted their bets on the RBA meeting on 3 November, assigning roughly 76% odds to a 25-basis-point increase.

The bigger surprise, though, came from the RBNZ, which held its official cash rate at 2.75% on a tight 4-3 vote. A 25-basis-point move had been widely anticipated, leaving traders wrong-footed and sending the kiwi sharply lower. NZD/USD was last down 1.1% at 0.5615.

Still, the RBNZ has not fully let go of its tightening stance, with the dissenting members holding a hawkish line. For now, the surprise of the hold is what will linger, since the bank's resolve looks weaker than investors had assumed heading into the meeting.

Central banks are not the only story, with oil moving again after a reported Houthi attack on a key Saudi refinery. Reports also suggest the US has warned that a brief yet forceful military campaign against Iran could take place after the midterm elections. Those factors have lifted crude, with WTI edging back above $101.

There is plenty to digest, and none of it helps the inflation story, particularly with the bond market still on edge this week even after yields pulled back.

Ten-year Treasury yields remain near 5.01%, keeping the spotlight on borrowing costs and equity valuations. Rising oil prices threaten to muddy that picture further, possibly making it tougher for central banks to get inflation under control.

Heading into the European morning, the focus will be on Treasury yields and overall risk appetite. The key catalysts, however, are still to come later in the US session.

The Fed's decision is the marquee event, but earnings from Microsoft and Alphabet will matter just as much for sentiment. With yields still high and doubts growing about whether huge AI investment will pay off, large technology stocks have little leeway to disappoint.