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European stocks mixed ahead of Fed interest rate decision

·4-min read
Jerome Powell, chairman of the Federal Reserve
The Federal Open Market Committee (FOMC) began its meeting on Tuesday and chair Jerome Powell is expected to make concluding remarks on Wednesday. Photo: Al Drago-Pool/Getty Images

European stocks were mixed on Wednesday as UK inflation surged past the Bank of England (BoE) benchmark and investors awaited the US Federal Reserve interest rate announcement later in the day.

The FTSE 100 (^FTSE) hit a 16-month high, finishing the day 0.4% up, just under the 7,200 mark. The index was dragged lower by commodity stocks earlier on Wednesday as China put miners under pressure after announcing it would release metal reserves in batches "in the near future".

Rio Tinto (RIO.L) declined as much as 0.9%, Anglo American (AAL.L) dropped 2% and Antofagasta (ANTO.L) was down 1.5%. Meanwhile, Glencore (GLEN.L) crashed 2.8%, Evraz (EVR.L) declined 1.5% and BHP Group (BHP.L) also lost ground, dropping 1.1%.

Watch: UK inflation rate soars past BoE expectations to 2.1% in May

It comes after official figureson Wednesday showed that in May the cost of living rose to the highest level since 2019. According to Office for National Statistics (ONS) data, the UK's consumer price index (CPI) jumped to 2.1%, above the 2% BoE target. Analysts expected it to rise to 1.8%, from April's 1.5%.

Transport made the largest annual upward contribution to inflation. Rising prices for fuels, clothing, recreational goods like games and recording media and meals pushed the rate higher on a monthly basis, rising 0.5% in May alone.

Watch: What is inflation and why is it important?

"The Bank of England was always expecting inflation to overshoot its target this spring, but it has taken the position that this is a short-term blip caused by rock-bottom prices a year earlier, and as soon as they naturally fall out of the figures, inflation will drop away again," said Sarah Coles, personal finance analyst at Hargreaves Lansdown. "It isn’t worried by the rise and it isn’t expecting to raise interest rates in the immediate future to bring it back down again."

Sterling rose sharply following the news – it was up 0.3% against the euro to €1.1646 (GBPEUR=X) just after 8AM in London and up 0.3% against the dollar to $1.4118 (GBPUSD=X).

Read more: Pound rises as soaring UK inflation puts pressure on the BoE to act

Elsewhere on the continent, France’s CAC (^FCHI) ended the session 0.3% higher, and the DAX (^GDAXI) closed flat in Germany.

Oil prices were rallying as investors bet on a looming supply crunch, with both benchmarks rising to record highs in recent days after hitting rock bottom last year. Crude (CL=F) was trading up 1.1% to $72.91 (£51.70) and Brent (BZ=F) was up 1.2% to $74.87.

Across the Atlantic, US stocks were mixed as investors kept a close tab on whether the Federal Reserve will stick with its dovish stance as optimism in America’s economy grows, and for any hint of chair Jerome Powell paring back the bond-buying programme.

Wall Street’s blue-chip S&P 500 (^GSPC) was flat by close of play in London, the Dow Jones (^DJI) fell over 0.1%, and the tech-heavy Nasdaq (^IXIC) curbed the trending rising 0.3% before trickling back to 0.1% up.

The Fed is back in the fray and its two-day monetary policy meeting is the big event that could indicate whether the US central bank will tweak its interest rates outlook. The Federal Open Market Committee (FOMC) kicked off its meeting on Tuesday and Powell is expected to make concluding remarks on Wednesday.

Watch: Will interest rates stay low forever?

Economic indicators across the board have shown signs of improvement, most notably the US vaccination push, which reduced mortality rates. This comes against a backdrop of falling jobless claims, surging purchasing managers’ index (PMI) data and a spike in non-farm payrolls.

While jobless claims have dropped to pandemic lows, the headline non-farm figure has repeatedly failed to match estimates in the last few months. This is important as Powell said he needs to see a "string of strong jobs reports" to consider tapering the Fed’s current stimulus programme.

"That topic of transitory inflation will be key as we look towards the FOMC meeting today, with the Fed looking unlikely to move the dials this time around," said Joshua Mahoney, senior market analyst at IG. "Instead, there is likely to be a focus on the latest dot plot and inflation projections, alongside questions around to what degree the Fed have discussed tapering in forthcoming meetings."

Dot plot is the Fed's guidance for how they expect to raise rates in the future.

Asian stocks struggled overnight. The Nikkei (^N225) fell 0.5% in Japan after figures showed the country's trade surplus jumped 49.6% last month, compared with the year before.

Meanwhile, the Hang Seng (^HSI) fell 0.7% and the Shanghai Composite (000001.SS) closed the session just over 1% lower.

Watch: What are SPACs?