A look at the day ahead from Saikat Chatterjee.

One of the most anticipated market events of the year is here.

The U.S. Federal Reserve is expected on Wednesday to detail plans to end its pandemic-era bond purchases by mid-2022 with a $15 billion per month "taper" broadly priced in.

What will be more decisive for traders is whether Chair Jerome Powell sticks to the view of transitional inflation based on one-time effects such as supply chains shortages or signals that these factors will have a more persistent and sustainable effect on inflation.

If he leans towards the latter, money markets which are already pricing in an astonishing 80 basis points of rate hikes by the end-2022, would get a further boost. That would increase pressure on policymakers to advance their projection for a first rate increase from 2023.

But even if the Fed manages to strike a delicate balancing act, the greenback is likely to hold on to a sizeable chunk of 2021's near 4.5% gain for another year, according to a Reuters poll. That's because of a widening rate differentials versus its rivals.

Equity markets, which have been largely impervious to the fireworks in bond markets in recent weeks, could take a tumble meanwhile if yields resume their rise again.

Ahead of the Fed decision, U.S. stock futures are drifting lower and European stock futures are consolidating gains. Risk appetite is slightly on the back foot as new locally transmitted COVID-19 cases in China spiked to a near three-month high and Premier Li Keqiang warned of downward pressure on the economy.

Benchmark yields on 10-year U.S. debt is holding well below last week’s highs while stock and currency market volatility, though slightly higher, remain pinned near 2021 lows.

Elsewhere, oil prices fell as industry data pointed to a big build up in U.S. oil stocks and pressure mounted on oil producing group OPEC to increase supply.

Key developments that should provide more direction to markets on Wednesday:

- Central bank speaker corner: Lagarde, Centeno, Villeroy

- Credit Suisse (SIX:CSGN) to tighten the reins after string of scandals

- Composite PMIs: UK, U.S.

- ADP private payrolls

- Lufthansa returns to profit as travel curbs ease, Online fashion retailer Zalando's profit falls