Stocks steady, $US dips as traders brace for Fed easing

The US dollar slipped on Wednesday while Treasury yields edged higher and global stocks steadied as traders weighed the odds of a super-sized Federal Reserve interest rate cut later in the day.

The US currency dropped 0.5 per cent against the yen to 141.68, handing back about half of its gains from Tuesday, when unexpectedly robust US retail sales data was taken as weakening the case for aggressive Fed easing.

US bond yields however ticked higher. The two-year Treasury yield, the most sensitive to short-term rate expectations, edged up 2.5 basis points to 3.617 per cent.

The chances of the Fed kicking off its easing cycle with a super-sized cut of 50 basis points (bps) were revived earlier this week, after media reports raised the prospect of more aggressive action.

Financial markets are fully pricing in a 25 bps rate cut, while the odds of a 50 bps cut stood at 61 per cent by Wednesday, according to LSEG data, up from as little as 14 per cent a week ago.

"We love this debate - everyone's very focused on 50 or 25 but what is important is that they communicate to the market that they intend to go neutral by next summer," said Samy Chaar, chief economist at Lombard Odier.

"The worst that you can get is they go 25 and pretend that everything is normal and that monetary policy still needs to be restrictive."

European stocks slipped 0.3 per cent, with technology and healthcare shares among the biggest laggards.

The MSCI's index of world stocks was flat after having touched a two-week high a day earlier and just below an all-time high.

Japan's Nikkei stock index climbed as much as 1.3 per cent early on in reaction to overnight weakness in the yen, but pared those gains to 0.5 per cent as the currency rebounded.

Wall Street finished nearly unchanged on Tuesday, failing to sustain early momentum that pushed the S&P 500 and Dow Jones to record intraday highs. S&P 500 futures pointed a flat open later on Wednesday.

The euro rose 0.2 per cent to $US1.1132. Sterling edged up 0.35 per cent to $US1.3208 after data showed British inflation held steady in August, but picked up in the services sector, adding to bets in financial markets that the Bank of England will keep interest rates on hold on Thursday.

Traders are pricing in just a 26 per cent probability of a 25-bp cut from the BoE on Thursday.

"Today's inflation data does not warrant any justification for a surprise cut tomorrow," said Derek Halpenny, head of research global markets EMEA at MUFG. "A larger 50bp rate cut from the Fed tonight would likely lead to increased speculation of a rate cut from the BoE."

Meanwhile, gold struggled to find its feet on Wednesday, trading flat at $US2,569 per ounce after retreating from record highs earlier this week.

Crude oil also pulled back after gaining about $US1 a barrel on Wednesday as tensions escalated in the Middle East.

US crude futures declined 1.4 per cent to $US70.22, and Brent crude futures lost 1.2 per cent to trade at $US73.83.