European stocks opened cautiously lower on Thursday as the Federal Reserve’s hawkish policy message offset optimism surrounding the new U.S.-Iran peace agreement.
Investors initially welcomed the diplomatic breakthrough, but expectations of higher U.S. interest rates quickly limited gains across the region.
European Stock Markets Open Mixed
The pan-European STOXX 600 index opened 0.2% lower.
France’s CAC 40, Italy’s FTSE MIB and Spain’s IBEX 35 traded close to unchanged. Germany’s DAX performed slightly better, rising 0.3%.
The mixed opening reflected uncertainty as traders balanced easing geopolitical risks against the possibility of tighter U.S. monetary policy.
US-Iran Deal Initially Supports Sentiment
Investors had expected the relief rally to continue after U.S. President Donald Trump signed a preliminary peace agreement with Iran.
The deal reduced concerns about further military escalation and sent crude oil prices lower.
However, the agreement remains fragile, and markets are still assessing whether both sides will comply with its terms.
Hawkish Federal Reserve Limits Market Optimism
The positive reaction to the U.S.-Iran agreement was quickly overshadowed by the Federal Reserve’s latest policy announcement.
The central bank kept its benchmark interest rate unchanged, as widely expected.
However, Fed officials indicated that the tightening cycle may not be over. Their comments suggested that another interest rate increase could take place later this year if inflation remains elevated.
Rate-Hike Expectations Rise Sharply
Bond and interest-rate markets adjusted rapidly following the Fed’s hawkish message.
According to the CME FedWatch tool, traders increased the probability of a December rate hike to 85%.
Before the Federal Reserve meeting, markets had priced in only a 42% chance of an increase.
The sharp shift strengthened concerns that borrowing costs could remain elevated for longer than investors had previously expected.
Falling Oil Prices Pressure Energy Stocks
Lower crude oil prices also weighed on European markets.
Energy giants BP and TotalEnergies declined as Brent crude moved toward important support levels.
The weakness in oil stocks placed pressure on Britain’s FTSE 100 and France’s CAC 40.
Although lower oil prices may reduce inflationary pressure, they can also weaken earnings expectations for major energy companies.
FTSE 100 Falls Ahead of Bank of England Decision
Britain’s FTSE 100 declined 0.5% as investors prepared for the Bank of England’s upcoming monetary policy announcement.
The central bank is widely expected to leave interest rates unchanged.
Therefore, traders are likely to focus more closely on Governor Andrew Bailey’s comments about inflation, economic growth and the future direction of UK interest rates.
Any change in the Bank of England’s guidance could influence the pound, government bonds and British equities.
ECB Officials Could Offer Rate Clues
Several European Central Bank officials are also scheduled to speak later in the day.
The group includes ECB Chief Economist Philip Lane.
Investors will watch their comments carefully for indications about the future direction of interest rates across the eurozone.
Markets remain sensitive to any suggestion that the ECB could keep policy restrictive or adjust its current rate outlook.
Tesco Shares Fall as Sales Growth Slows
Among individual stocks, Tesco declined approximately 2.5%.
The British food retailer came under pressure after reporting slower sales growth.
Informa moved in the opposite direction, gaining around 2% after the company signalled stronger growth prospects.
European markets may remain volatile as investors assess the Federal Reserve’s hawkish stance, central bank guidance across the region and further developments in the U.S.-Iran agreement.
