European stocks rallied as fears of a US rate hike eased, with the DAX 40 reaching an all-time high and the FTSE 100 closing a winning week on a positive note. The pan-European STOXX 600 index also rose 0.4 per cent by 1300 GMT, trading at its own record levels, as investors digested a sharp shift in expectations for Federal Reserve policy.
The FTSE 100 closed up 26.16 points, or 0.3 per cent, at 10,679.03, while the FTSE 250 ended 121.22 points higher, up 0.5 per cent, at 23,538.80. The AIM All-Share bucked the trend, falling 1.36 points, or 0.2 per cent, to 776.09. For the week, the FTSE 100 gained 1.6 per cent, the FTSE 250 rose 1.7 per cent, and the AIM All-Share added 0.9 per cent. In continental Europe, the CAC 40 in Paris ended up 0.4 per cent, and the DAX 40 climbed 0.8 per cent in Frankfurt, after earlier hitting an intraday record of 25,826.78. US financial markets were closed on Friday for the Independence Day public holiday.
Rate hike expectations evaporate
The key catalyst for the rally was Thursday’s weak US jobs figures, which have dramatically reduced the likelihood of a Federal Reserve rate increase. According to the CME’s Fedwatch tool, expectations for a July rate hike have plunged to 17 per cent from 40 per cent. There is now less than a 50 per cent chance of a rate hike by December; before the payrolls data, markets had priced in a 50 per cent chance of two hikes by the end of the year.
Kathleen Brooks, research director at XTB, said the market tone was “positive” as the payrolls data brought relief. “A mixture of relief post the payrolls data, a reversal of the sell-off in the chip stocks and more volatility in the yen are the main narratives today,” she explained. She noted that weaker jobs data reduces the chances of US rate hikes, which tends to benefit growth stocks by lowering borrowing costs and increasing the present value of future profits. “This can be a powerful driver of stock price growth,” she added.
The shift in rate expectations is also part of a broader rotation out of highly valued US technology stocks and into more attractively priced cyclical and industrial companies in Europe. The Dow Jones Industrial Average has also reached record highs, while semiconductor stocks have faced selling pressure. European equities have benefited from profit-taking in AI-related stocks that dominated returns in recent years, with the DAX 40 climbing to a second day of all-time highs, nearing the 26,000 mark.
UK services sector contracts
Against the backdrop of global optimism, data published by S&P Global showed that the UK services sector contracted at the sharpest pace in nearly three-and-a-half years in June. The final seasonally adjusted services PMI business activity index fell to 48.8 from 49.3 in May, remaining firmly below the 50-point threshold that separates growth from contraction. The reading was marginally above the flash estimate of 48.7 published in late June. It marked the weakest service sector performance since January 2023 and a second consecutive month of declining business activity.
The final composite output index, which combines services and manufacturing, declined to 49.3 in June from 49.7 in May, coming in lower than the flash reading of 49.4. This was the weakest reading since April 2025. Service providers cited lacklustre domestic economic conditions, ongoing geopolitical uncertainties linked to the Middle East conflict, and general risk aversion among clients. Consumer-facing firms noted that the late-June heatwave affected footfall, although some hospitality businesses reported a boost from the FIFA World Cup. Total new work declined for the fourth consecutive month, with the rate of contraction accelerating to its fastest since November 2022. Employment across the sector fell again, with the pace of job losses the sharpest since February, as firms responded to reduced business requirements and margin pressure.
There was better news on inflation: the latest increase in input prices was the slowest since March, largely due to lower fuel costs, although firms continued to report higher transport, wage and raw material costs. Business optimism improved slightly in June compared with May but remained softer than at the start of 2026. Hopes for a durable US-Iran ceasefire agreement contributed to the improvement, but concerns about the broader UK economic outlook persisted.
Separately, the Bank of England’s closely watched Decision Maker Panel for June showed year-ahead expectations of businesses’ own price growth holding broadly steady at 4 per cent, comfortably higher than the pre-war level of 3.4 per cent. However, businesses’ broader expectations of consumer price inflation for the year ahead fell from 3.7 per cent to 3.3 per cent, indicating a response to lower energy prices. Expected wage growth for the year ahead nudged higher to 3.5 per cent from 3.4 per cent.
Currency and commodity markets
In currency markets, the euro traded lower against the greenback, at $1.1440 on Friday compared with $1.1449 on Thursday. Against the yen, the dollar was trading at ¥161.30, up from ¥160.87 on Thursday. The yen gave back some of Thursday’s strong gains amid speculation that the Bank of Japan will intervene to support the currency. David Morrison at Trade Nation said there were signs that traders were buying back yen on fears that Japan’s Ministry of Finance may have used today’s thin holiday market conditions as an opportunity to intervene. “Yet there’s no evidence that they have so far,” he added.
The pound traded at $1.3351 on Friday afternoon, down from $1.3367 on Thursday. Against the euro, sterling ebbed to €1.1672 from €1.1681 on Thursday. The dollar index fell around 0.6 per cent over the week as expectations of further Federal Reserve rate hikes eased, lifting the euro to a two-week high and helping sterling record its strongest weekly performance in almost three months.
In commodities, Brent crude for September delivery traded higher at $71.76 a barrel on Friday, up from $70.76 on Thursday. Analysts at Citi have predicted a significant drop to $60 a barrel by year-end, assuming the US-Iran truce holds. Gold traded at $4,167.57 an ounce on Friday, up from $4,124.43 on Thursday. Dan Coatsworth, head of markets at AJ Bell, explained that gold’s rebound followed the soft US jobs data. “The shift in rate expectations led to a drop in US Treasury yields, meaning the opportunity on fixed income was slightly diminished and thereby dampening one of the drivers that’s taken money away from gold this year,” he said. “Investors might have seen this market shift and decided it was time to add back some more gold.” Gold is expected to trade in a range between $3,900 and $4,500 this month.
Company movers
On the FTSE 100, Pearson fell 1.4 per cent after it apologised and announced that this year’s Sats examination results in England would be delayed by more than a week. The publishing and education group said the delay was caused by “technical issues” with the new Sats platform and data transfer systems, pushing the publication of results from 7 July to 16 July. The National Association of Head Teachers told the BBC that “something has gone badly wrong” and that “schools must be given cast-iron assurances that the results they receive are reliable”. Education Secretary Bridget Phillipson called the delay “deeply frustrating” for schools, parents and pupils and said the government was working to resolve it. The Department for Education is understood to be considering penalties or cancelling Pearson’s £180 million contract. GCSEs, A-Levels and vocational qualifications are not affected.
On the FTSE 250, Johnson Matthey rose 5.0 per cent after it said it expects to complete the sale of its Catalyst Technologies business to Honeywell International by the end of August, having received final regulatory approval from China’s State Administration for Market Regulation. The deal, originally struck at £1.80 billion in May 2025, was slashed to £1.33 billion in February. Close Brothers rose 7.9 per cent as Shore Capital upgraded its rating to “buy” from “hold”. Analyst Gary Greenwood noted that motor finance uncertainty continues to weigh on sentiment but added that, following recent share weakness, investors are “adequately compensated for the risks”.
The biggest risers on the FTSE 100 were Lion Finance Group, up 320.0p at 11,750.0p; Weir Group, up 64.0p at 2,508.0p; ICG, up 38.0p at 1,776.0p; Metlen Energy & Metals, up 0.8p at 42.7p; and St James’s Place, up 26.5p at 1,303.0p. The biggest fallers were Entain, down 11.4p at 528.6p; Babcock International, down 17.5p at 1,039.0p; DCC, down 100.0p at 6,090.0p; Games Workshop, down 340.0p at 21,140.0p; and Tesco, down 7.0p at 466.6p.
