European stocks rally pauses ahead of Fed outcome

European stocks struggled for momentum on Wednesday after a tentative recovery in the past two sessions, with investors looking ahead to a crucial monetary policy decision from the Federal Reserve amid turmoil in the banking sector.

The pan-European STOXX 600 index (.STOXX) inched up 0.1% after a two-day bounce, lifted by banking stocks following a series of measures to stabilise the sector in the wake of the collapse of three U.S. banks and trouble at lender Credit Suisse.

European banks index (.SX7P) gained 0.7%, adding to a 5% jump in the past two sessions when UBS’ (UBSG.S) state-backed takeover of Credit Suisse and coordinated actions by central banks to boost liquidity lifted sentiment, reported Reuters.

The focus shifts to the Fed, which is expected to raise interest rates by 25 basis points (bps) later in the day, a decision that will land amid a brewing political storm over the US central bank’s oversight of recently collapsed Silicon Valley Bank.

The Fed decision is due at 1800 GMT and Chair Jerome Powell will speak at a news conference half an hour later.

“Markets are very much aware that the Fed is stuck between a rock and a hard place, with policymakers facing an apparent dilemma between financial stability or price stability,” said Han Tan, chief market analyst at Exinity Group.

“If the dot plot points to a terminal rate that’s higher than the 5.1% that FOMC officials forecast back in December, such hawkish clues may prompt another risk-off wave across the equity market.”