European shares and the euro dipped on Thursday as cautious comments on inflation from the US Federal Reserve gave investors pause before a series of central bank decisions in Europe. The European Central Bank and the Bank of England are due to announce their final policy decisions of the year later in the day, with both expected to keep benchmark rates on hold.

Weakness in bank stocks contributed to a downbeat open in Europe, as the pan-European STOXX index fell almost 0.2 per cent. The financial sector caught the cold from US and Asian trading, which suffered from a less hawkish than expected tone from the Fed after it raised rates as expected on Wednesday and stuck to a projection for three hikes next year.

Yellen's cautious comments

Banks were the worst-performing sector in Europe as cautious comments from Fed Chair Janet Yellen on persistently low inflation rattled investors. Surveys of purchasing managers indexes from Germany and the euro zone came in stronger than expected, but failed to boost the euro, which fell 0.1 per cent in morning trade.

In a session packed with central bank decisions, the Norwegian crown rose over 1 per cent against both the dollar and the euro after the central bank in Oslo brought forward its forecast for when rates might rise. The Swiss franc fell against the dollar and the euro after the Swiss National Bank maintained its ultra-loose monetary policy stance and said the local currency remained “highly valued".

Fed inflation outlook

Against a basket of currencies, the dollar was largely unchanged, still nursing a 0.8 per cent loss in the wake of the Fed's decision. The Fed projected inflation to remain shy of its goal for another year, giving policymakers little reason to accelerate the expected pace of rate increases.

“The make-up of the Federal Reserve is going to change a lot in the next few months and with that we can't necessarily put too much weight behind the statement last night,” said David Madden, CMC markets analyst in London.

Asian stocks bounce

Asian stocks rose on Thursday after the Fed decision, and the MSCI World Index, which tracks stocks in 47 countries, was up 0.1 per cent. China's central bank also raised rates, though marginally. While Chinese shares slipped, the wider impact was limited.

“The key takeaway from the Fed meeting was the degree of concern shown towards low inflation, which likely led to two dissenting votes,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo. “The 10-year Treasury yield fell sharply on the Fed's stance and lacklustre US CPI, which shows that the markets don't necessarily see the Fed hiking rates three times in 2018.”

US Treasury yields

After dropping overnight, the 10-year Treasury yield crawled up to 2.3761 per cent. The Fed's less hawkish statements supported MSCI's broadest index of Asia-Pacific shares outside Japan, but by afternoon its gain had been pared to 0.15 per cent.

China hikes interest rates

China's yuan was firmer and Shanghai shares were lower after the People's Bank of China hiked the reverse repo rate and the one-year medium-term lending facility (MLF) rate by 5 basis points as Beijing seeks to prevent destabilising capital outflows without hurting economic growth.

South Korea's KOSPI climbed 0.5 per cent. Other gainers included equities from Taiwan, Thailand and Malaysia. Japan's Nikkei lost 0.3 per cent, hurt by dollar weakness after the Fed decision. In commodities, US crude futures rose 0.15 per cent to $56.61 per barrel, lifted by the weaker dollar after two days of losses. Brent advanced 0.3 per cent to $62.63 per barrel.

Spot gold was flat after rising to a one-week high of $1,259.11 an ounce. Copper and nickel also advanced. A lower dollar generally makes dollar-priced commodities such as oil, gold and industrial metals cheaper for non-US investors, boosting demand.