The Federal Reserve's interest rate cut bet is still heating up, and the yen has fallen sharply. Beware of this risk today

On Wednesday (December 20), dovish policy signals from both ends of the globe drove Asian stocks higher, which bodes well for European stocks.

Bets that the Federal Reserve will cut interest rates sooner continue to heat up, with Richmond Fed President Thomas Barkin saying "we are making good progress on inflation", seen as more evidence for the notion of peaking rates and a soft landing that has pushed the Dow and Nasdaq indices to all-time highs, with the S & P 500 index not far behind.

According to the Chicago Mercantile Exchange's FedWatch tool, traders currently see a more than three-quarters chance that the Federal Reserve will cut interest rates by 25 basis points before March, though Chicago Fed President Goolsbee may again depress market pricing in an interview with the Wall Street Journal podcast later Wednesday.

The dollar is hovering near four-month lows - except against the yen, which has been undermined by the unflinching dovishness of the Bank of Japan, which not only maintained its ultra-loose stimulus on Tuesday, but also fought against yen bulls by maintaining cautious policy guidance.

Japanese government bond yields fell to multi-month lows in Tokyo, while benchmark U.S. government bond yields continued to oscillate near their lowest level since July.

The Nikkei index rose 1.6 percent, near a 33-year high, driven by U.S. stocks and the Bank of Japan.

European Central Bank President Christine Lagarde may have warned against complacency last week, but investors seem confident that a rate cut is imminent, especially with the latest data showing that price pressures in the euro zone have eased significantly.

Indicators worth watching in Europe include inflation data from Germany and the UK, while consumer confidence indices will also be released in Germany and the Eurozone.

U.S. consumer confidence data will be released later, but the main data will still be the Federal Reserve's favored inflation measure, the Personal Consumption Expenditure (PCE) price index, which will be released on Thursday.