European Stocks Edge Higher as Fed Rate Pause Bets Rise

European equities moved modestly higher on Monday as falling government bond yields and a weaker U.S. dollar supported investor sentiment. Markets are increasingly betting that the Federal Reserve will keep interest rates unchanged at its September meeting.

The pan-European Stoxx Europe 600 Index gained around 0.2%, recovering some ground after ending a four-week winning streak last Friday. Germany’s DAX also advanced about 0.2%, while France’s CAC 40 remained broadly flat. The UK’s FTSE 100 outperformed regional peers with a gain of roughly 0.4%.

European stocks received additional support from easing sovereign bond yields, which retreated from recent multi-week highs. Lower borrowing costs tend to benefit growth-oriented stocks, while the softer U.S. dollar reflected shifting expectations for Federal Reserve monetary policy.

Money markets are now pricing in approximately a 70% chance that the Fed will hold benchmark interest rates steady in September. Expectations have shifted following a string of weaker U.S. economic indicators.

Recent data included a disappointing July employment report, inflation readings that showed limited additional price pressure, and an unexpected 0.6% decline in July retail sales. Together, the figures have reduced expectations for near-term monetary tightening and strengthened hopes that policymakers can maintain current rates without reigniting inflation.

Despite improving rate expectations, gains in European equities remained limited. Continued tensions surrounding commercial shipping through the Strait of Hormuz have helped keep crude oil prices elevated, creating cost pressures for energy-intensive European companies. Investors are also questioning whether valuations have become stretched after a strong summer rally pushed major European stock indexes close to record highs.

With second-quarter earnings season largely complete and Europe’s economic calendar relatively quiet, investors are turning to global economic signals for direction.

Attention will now shift to the upcoming U.S. S&P Global flash PMI data for August, followed by the Federal Reserve’s Jackson Hole Symposium. Markets will assess whether economic activity is cooling at a pace consistent with a soft landing while keeping inflation under control.