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Investors in Europe took the Federal Reserve rate hike in their stride.
Both the Euro Stoxx 50 and the broader pan-European Stoxx 600 traded over 0.6% higher at the start of Thursday’s session.
France’s CAC 40, Germany’s DAX 30, Italy’s FTSE MIB, Spain’s IBEX 35, the Netherlands’ AEX and Switzerland’s CH20, all traded between 0.2% and 0.7% higher than their Wednesday close.
The UK’s FTSE 100 led the pack and rose more than 1%.
Carmakers and industrials led the Paris index, with Renault gaining more than 2%, Stellantis 1.6% and Schneider Electric 1.3%. Technology went the other way, with Dassault Systèmes falling 2.4%.
The calm followed a rougher session in New York, where the Dow Jones Industrial Average closed 1.2% lower on Wednesday and the S&P 500 fell 0.4%, while the Nasdaq was broadly flat.
Asian markets were mixed overnight with Tokyo’s Nikkei 225 rising 0.2%, Seoul’s Kospi gaining 0.9%, while Hong Kong’s Hang Seng lost 0.7% and the Shanghai Composite 0.4%.
Reactions were “pretty much expected since the rate hike was also in line with market expectations”, said Lorraine Tan, director of equity research for Asia at Morningstar, adding that the Iran war is likely to keep pressure on inflation.
The more consequential moves were in currencies and bonds.
The US dollar climbed to its highest in seven weeks against a basket of major currencies, lifted by the jump in short-dated Treasury yields that followed the decision.
The euro was trading around $1.146, down 0.5% from Wednesday’s open.
A stronger US dollar makes European exports more competitive in American markets, but it also raises the cost of anything priced in dollars, which includes oil and gas, which compounds Europe’s energy bill at a difficult moment.
In bond markets, the two-year Treasury yield, the maturity most sensitive to rate expectations, jumped to around 4.72% from 4.67% before the decision, holding near that level on Thursday.
The 10-year sat close to 5%, reflecting both the war-driven energy shock and mounting investor concern about American government debt.
Traders now fully expect another rate hike by December and put the odds of a move as soon as October at around 50%. Goldman Sachs became one of the first major Wall Street banks to forecast consecutive hikes, reversing its previous view that this month’s move would be the only one.
Attention turns next to the Bank of England, which announces its decision later on Thursday and is expected to hold rates steady, and to the Bank of Japan on Friday, where a hike is anticipated.
Additional sources • AP
Frankfurt has tightened again.
The European Central Bank’s governing council lifted the deposit facility rate from 2.25% to 2.5% on Thursday. It is the second hike since 11 June, when the ECB moved for the first time in three years.
The ECB sets monetary policy for the eurozone through three key interest rates, with the deposit facility rate serving as its main policy benchmark.
The main refinancing rate was lifted to 2.65% and the marginal lending facility to 2.9%.
In its statement, the central bank noted that “the conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period,” while ensuring that “with today’s decision, the Governing Council remains well positioned to navigate the uncertainty caused by the conflict.”
The ECB staff projections continue to estimate that headline inflation will average 3% this year. However, it has revised up the expectations for 2027 and 2028 to 2.5% and 2.1% respectively, compared with June.
The decision follows an August inflation reading of 3.3%, up from 2.9% in July and the highest since September 2023.
Energy costs did nearly all the work, with energy inflation jumping to 14.3% from 10.3%, as fighting around the Strait of Hormuz kept crude supply constrained. The problem persists as Brent crude crossed $100 a barrel again on Wednesday due to renewed exchanges of fire between the US and Iran.
Underneath, the picture is calmer.
Core inflation, which strips out energy, food, alcohol and tobacco, actually fell to 2.4% from 2.5% in August, while services inflation, the component most sensitive to wages, dropped to 3% from 3.3%. There is still little sign that expensive energy is spreading into the rest of the economy.
That distinction has been central to the ECB’s own thinking.
In a paper published earlier this month, its economists found that adverse energy supply factors accounted for around 90% of the rise in energy inflation between January and May of this year.
“This time the energy supply shock dominates, while demand and public policy stimulus have minor roles,” the economists wrote, contrasting it with the 2021-22 surge that prompted a far more aggressive response.
The eurozone inflation average conceals a wide spread.
August inflation ran at 4.5% in Spain, 2.9% in Germany and 2.7% in France, three economies facing the same energy shock with markedly different outcomes.
Growth complicates matters further.
The bloc has held up better than expected, but resilience is not overheating, and even at 2.5% the deposit rate remains within the range the ECB considers neutral. Going further would mean deciding that policy must actively restrain the economy.
Christine Lagarde had signalled this move in July, when the council held rates but instructed staff to model oil and gas scenarios ahead of September.
“The burden of proof is on data,” Lagarde said then, adding that “the full inflationary impact of the energy shock has yet to play out.”
Thursday’s decision comes alongside fresh staff projections, though their cut-off date falls roughly two weeks before the meeting, meaning neither the latest leg higher in oil nor the surge in European government bond yields to 15-year highs will be reflected.
Attention now turns to Frankfurt’s peers.
The Federal Reserve will announce on 16 September and the Bank of Japan on the 18, with both expected to consider hikes of their own.
Meanwhile, the Bank of England will decide on 17 September and is expected to hold rates as it currently maintains a much higher benchmark than the rest at 3.75%.
JHVEPhoto
PayPal (PYPL) quickly ticked higher by 0.7% amid some renewed takeover speculation.
There’s some speculation that the fintech company has received takeover interest, according to traders, who cited a Betaville “uncooked” alert that was circulating on Thursday.
It’s not clear
Asian stocks fell on Monday as hawkish comments from Federal Reserve boss Kevin Warsh saw investors ramp up bets on a US interest rate hike, while oil prices spiked after a fresh flare-up in the US-Iran war.
With inflation remaining stubbornly high – largely on the back of elevated energy costs – the US central bank has come under pressure to act, and Warsh’s refusal to provide guidance has stoked uncertainty.
But in a highly anticipated speech at the Jackson Hole symposium of central bankers and economists in Wyoming, he left traders with few doubts that he was ready to increase borrowing costs.
Warsh said: “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.”
He called the spike in inflation – currently at 3.7% and nearly double the Fed’s 2% target – “concerning”, and said he would be “hard-pressed” to describe current financial conditions as “restrictive”, a potential hint that rate hikes could be on the horizon.
However, he stopped short of saying he would support a hike, adding: “I stand here today committed to a discipline, not to a decision.”
All three main indexes on Wall Street fell Friday. Yields on short-term US Treasury bonds – which reflect monetary policy expectations – jumped, and the dollar rallied against its peers. Gold, which benefits from lower interest rates, fell.
And Asia followed suit, with tech firms – which rely on borrowing to fuel their huge AI investments – leading the way down.
Tokyo, Seoul, Hong Kong, Shanghai, Taipei and Jakarta were all down, though Singapore and Wellington edged up.
Focus will now turn to a string of crucial data releases over the next two weeks before the Fed makes its decision, with jobs up this week and the consumer price index (CPI) next week.
“Should we get an inline payrolls print that does not give the Fed too much to work with, next week’s core CPI report will become the major decider for the market’s Fed belief system,” wrote Chris Weston at Pepperstone.
“The volatility priced around that outcome across rates, forex and equities could therefore be significant.”
The Fed’s battle against inflation has been hobbled by the Iran war, which has pushed oil prices higher.
And after a run lower for most of last week, they spiked again on Monday, a day after the United States said it had attacked Iranian rocket launchers on a small island in the Strait of Hormuz, its first strikes on the country in a month.
The attack prompted Tehran to retaliate by hitting US military targets in Jordan. Both main crude contracts rose more than 2% on Monday.
The exchange came shortly after the US-Iran war hit the six-month mark, and at a time when hostilities had been subsiding.
The news revived concerns about the conflict, with attempts and peace talks appearing to be going nowhere and the strait – through which a fifth of global crude and gas passes – largely closed.
US officials this month vowed the “economic asphyxiation” of Iran to make it open the waterway.
“Hormuz is once again threatening to put a floor under oil just as Warsh is putting a ceiling on how much inflation patience markets should assume from the Fed,” said Quintex Intel’s Stephen Innes.
“For oil traders, (the) move is another reminder of how quickly the geopolitical premium can return.
“Physical flows through Hormuz have improved materially from their worst levels, which is precisely why crude had started giving back some of the fear premium, but the latest exchange shows how fragile that progress remains and how quickly the shipping story can be pushed back onto the trading desk.”
Additional sources • AFP
Kenyan police fired teargas at traders in the capital Nairobi on Friday, during a protest against higher taxes on imports introduced by the government. The new tax rules raise the minimum import fee for a shipping container by nearly 30 percent.
Published On 28 Aug 202628 Aug 2026
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