European Markets Show Mixed Performance Ahead of Bank of England Decision
The UK's FTSE 100 rose 0.5%, and France's CAC 40 gained 0.4%, while Germany's DAX remained near flat. Investors await the Bank of England meeting, where the rate is expected to stay at 3.75% amid persistent services inflation.
Analytical article: The Calm Before the Storm — Why the Bank of England Won't Change Rates, Yet Markets Are Still Jittery
[The Gist]: What's Really Happening
All 65 economists surveyed by Reuters between June 5 and 12 unanimously forecast that on June 18, the Bank of England will keep its key rate at 3.75%. That's the consensus. But the numbers hide a tectonic shift: nearly 40% of respondents now factor in at least one rate hike by the end of 2026. Six months ago, the talk was about cuts. Now it's about increases.
The key non-obvious insight that the media misses is that the Bank of England is caught in a three-way trap. First, an exogenous inflationary shock from the war with Iran, which drives up energy prices and disrupts supply chains. Second, a weakening domestic economy, which contracted by 0.1% in April for the first time since August. Third, the policies of other central banks, especially the hawkish stance of the European Central Bank, which continues tightening.
But the real drama is not about the rate itself; it's that markets have stopped believing in a single global narrative. J.P. Morgan's forecasts directly state: monetary divergence will be the defining feature of 2026. The Bank of England no longer "follows the Fed" — it must dance to its own, highly uncomfortable tune.
Timeline and Context
The situation has been heating up gradually, but the last two weeks have been critical. On June 12, data showed an unexpected 0.1% contraction in the UK economy in April. That would seem to be an argument for easing. But at the same time, everything is getting more expensive: from airfares (+10% month-on-month) to hotels (+14%) and fuel.
Below is a timeline of key events leading up to the June 18 decision:
| Date | Event | Impact on Rate Expectations |
|---|---|---|
| May 22 | Iran strikes US targets | Oil rises above $90, inflation expectations jump |
| June 5-12 | Reuters survey of 65 economists | 100% forecast rate at 3.75% on June 18, but 40% expect a hike in 2026 |
| June 11 | Speech by MPC member Megan Greene | "The case for a rate hike is growing" due to the prolonged war with Iran |
| June 12 | UK GDP data for April | 0.1% decline, first contraction since August |
| June 12 | Trump says possible truce with Iran "this weekend" | Oil falls 6%, markets rally — FTSE +1.63% |
| June 18 | MPC meeting | Rate expected to be held, key focus on tone of statement |
Monetary Policy Committee member Megan Greene gave a speech arguing for a possible rate hike, as the protracted war with Iran increases the likelihood of broad-based price increases across the economy. Her stance is important: she acknowledges that global shocks are becoming more frequent, and central banks find it increasingly difficult to ignore external factors.
Against this backdrop, hope emerged on June 12: President Trump said a peace deal with Iran could be signed as early as this weekend. WTI crude oil price plunged 6% in a day, European markets soared. The FTSE 100 gained 1.63%, CAC 40 1.83%, and DAX 1.76%. Italy's banking sector surged 3.66% — the biggest gain among European sectors.
But this euphoria may be premature. Deutsche Bank warns: if energy prices remain at current levels, the risks are tilted toward tightening by the Bank of England.
Winners and Losers
Winners. The banking sector in the UK and Europe is a direct beneficiary of any interest rate uncertainty. On the day oil fell on hopes of a truce, European banks rose more than 4%. The mechanism is simple: if rates stay high or rise, banks' net interest margins widen.
HSBC, which has the largest weight in European banks, confirmed its "overweight" stance. Italian banks, more sensitive to sovereign bond spreads, showed the best performance in Europe. NatWest and Lloyds in London also benefit from expectations that the Bank of England will not rush to cut rates.
Losers. British consumers and borrowers with floating-rate mortgages. If the Bank of England is forced to raise rates in the second half (even by 25 basis points), it would hit the mortgage market, which has only just started to recover. Sonia swap rates already price in 21 basis points of tightening by September.
The real estate sector is another loser. Higher rates increase borrowing costs for developers and reduce mortgage affordability for buyers. Shares of UK homebuilders (Persimmon, Barratt) could come under pressure.
Also losing out are importers dependent on a weak pound. If the Bank of England continues to lag behind the Fed and ECB in tightening pace, the pound will weaken. ING forecasts GBP/USD moving toward 1.3300 with a risk to 1.3200. This benefits exporters but raises the cost of imported goods, including energy and food.
What the Media Isn't Saying
The first and most important untold story is the split within the Monetary Policy Committee itself. J.P. Morgan directly states that this split will be the main source of volatility for short-term sterling rates. Even if the rate formally remains unchanged on June 18, the market will be rattled by conflicting signals from MPC members.
Megan Greene's recent speech showed that the hawkish wing is gaining strength. Greene cited historical examples: in the 1970s and 1980s, when countries faced oil shocks, central banks acted in divergent ways. Now there are risks of a repeat scenario. "I expect global shocks to become more frequent as a result of geo-economic risks and climate change," she said.
The second underreported factor is the influence of UK gilts. The yield on 10-year gilts has already risen, and according to J.P. Morgan, the UK market offers "significantly more yield/carry than many other developed countries." This creates a paradoxical situation: even if the Bank of England does not raise rates, the market itself prices in a higher risk premium. In effect, financial conditions are tightening without the regulator's involvement.
The third omission is the role of options markets. As noted in Megan Greene's speech, the distribution of rate expectations shows a significant "skew" toward tightening — even though the central forecast remains unchanged. This means markets are hedging against a sudden hike by buying protection. Such behavior itself creates additional pressure on liquidity.
Forecast: Next 30 Days and 90 Days
Next 30 days (to mid-July 2026). Key date is June 18. Base case (85% probability): rate stays at 3.75%. The vote will not be unanimous — at least one MPC member will vote for a hike. The tone of the statement will be "hawkish-neutral": the phrase "further actions will depend on data" will be the main signal.
Market reaction: the pound may briefly strengthen by 0.5-1% due to the lack of surprises, but then return to a weakening trend. The FTSE 100 will remain in the 10,300-10,600 range, supported by lower oil prices. The most volatile will be energy sector stocks and banks.
Pessimistic scenario (10%): Greene and 1-2 other members vote for a hike, and the statement hints at readiness to act in August. In this case, GBP/USD could jump to 1.3450, and the FTSE could fall 2-3% on fears of tightening.
Optimistic scenario (5%): Trump actually signs peace with Iran, oil falls to $70-75. The Bank of England holds rates, rhetoric turns dovish. The pound weakens to 1.30, the FTSE rises to 10,800 on lower inflation fears. But this scenario is unlikely over a 30-day horizon.
Next 90 days (to mid-September 2026). Here the main uncertainty is geopolitics. Deutsche Bank forecasts UK inflation peaking at 3.6% by year-end. If a truce materializes and energy prices stabilize, the peak could be lower — around 3.0-3.2%. In that case, the Bank of England would remain on hold until year-end.
But if the war drags on and oil stays above $90, the Bank of England will have to act. A 25 basis point hike in September-November becomes the base case for the hawkish camp (40% of Reuters respondents).
By September, the pound will likely trade in the 1.30-1.34 range against the dollar, and the FTSE 100 between 10,200 and 10,800. Rising rates will weigh on indices, but a weaker pound will support exporters. The banking sector will remain a favorite.
Editorial Forecast
Asset: GBP/USD pair. Direction: moderate decline in the 24-72 hours after the Bank of England decision — "buy the rumor, sell the fact." We expect a move from current levels around 1.3370 to 1.3300-1.3320. Key levels: resistance — 1.3450 (local high), support — 1.3250 (50-day moving average). Confidence level: medium (60%). Main risk: unexpectedly hawkish tone of the MPC statement or an actual vote for a hike — in that case, GBP/USD could briefly spike to 1.3500 before correcting. The Bank of England decision is the main trigger; watch the vote at 14:00 Moscow time on June 18.
— Editorial Team
