European markets lacked clear direction on Thursday as investors positioned themselves ahead of an anticipated interest-rate move from the European Central Bank and monitored escalating tensions between the U.S. and Iran.
The pan-European STOXX 600 opened little changed, trading close to recent levels after the index had hit its weakest point in more than three weeks during the previous session. In London, the FTSE 100 was up 0.2% after having fallen to its lowest level since late March on Wednesday. Germany’s DAX slipped 0.1%, remaining around three-week lows, while Italy’s FTSE MIB rose 0.4%.
ECB move all but priced in
Market participants widely expect the European Central Bank to lift its key deposit rate by 25 basis points to 2.25% when policymakers announce their decision at 1215 GMT. If enacted, the adjustment would be the ECB’s first rate increase since 2023 and would underscore officials’ resolve to rein in inflation despite signs of slowing growth.
For companies and households, the timing of tighter monetary policy - coinciding with a rebound in energy costs - presents a difficult mix. Higher borrowing rates risk weighing on business investment and consumer spending, while rising fuel and utility bills could squeeze margins for firms in energy-intensive sectors.
Markets have already trimmed expectations for ECB rate cuts later in the year, removing a previously important support factor for European equities. European government bond yields remained elevated ahead of the decision, further tempering demand for risk assets.
"How far ECB President Christine Lagarde goes during the press conference towards underpinning existing expectations for a fully priced follow-up move in September is the key issue," Sam Hill, head of market insights at Lloyds Bank said. "She won’t want to fully commit to it so far in advance, but equally don’t look for her to try too hard to try and dissuade markets from where they are already at."
Geopolitical jitters weigh on sentiment
Geopolitical concerns were prominent as the U.S. and Iran exchanged air strikes for a second consecutive day. President Donald Trump warned that further military action could follow unless Tehran agreed to an immediate peace deal. The renewed hostilities have cooled hopes for a diplomatic breakthrough between Washington and Tehran, reversing some recent optimism that had supported global markets.
Investors are wary that a prolonged conflict could threaten energy supplies from the Middle East and potentially trigger another round of inflation at a time when central banks are still contending with persistent price pressures.
Selected corporate moves
Among individual equities, Hugo Boss AG NA O.N. (ETR:BOSSn) surged about 8% after Frasers Group PLC (LON:FRAS) launched a 2 billion euro takeover offer for the German fashion brand. Wizz Air Holdings PLC (LON:WIZZ) rose roughly 3% after reporting annual profit that beat estimates. By contrast, heavyweight SAP SE (ETR:SAPG) declined nearly 3%.
These stock-specific developments stood out in an otherwise muted session, highlighting how corporate events continue to produce volatility at the individual security level even as macro forces dominate broader market positioning.
What to watch next
In the near term, the ECB’s policy statement and the accompanying press conference will be central to market direction, particularly the extent to which officials signal follow-up moves. At the same time, developments in the Middle East and the resulting effect on energy prices will remain a key risk for inflation dynamics and corporate margins.
Until these threads are resolved or clarified, European equities are likely to trade in a constrained range, with bond yields and sectoral exposure to energy costs acting as important determinants of relative performance.