European stocks dip as Middle East war fuels ECB rate hike bets

Friday 27 March 2026 - 15:40

By: Dakir Madiha

European stocks dip as Middle East war fuels ECB rate hike bets

European stocks edged lower Friday as investors weighed the economic fallout from the ongoing Middle East war. Disruptions to energy flows through the Strait of Hormuz stoke inflation fears across the continent.

The STOXX 600 fell 0.2 percent to 579.71 points. Mid-cap stocks led losses with a 1.4 percent drop. The decline capped a turbulent week driven by geopolitical shifts, including extra US forces in the region and changing views on European monetary policy.

The conflict, now in its fourth week, upends European Central Bank policy outlooks. Markets expected steady rates through 2026 or even 2027 as recently as February. That view flipped. Goldman Sachs on March 23 forecast two 25-basis-point hikes in April and June, aligning with J.P. Morgan and Barclays calls for tightening. LSEG data shows markets now price in three quarter-point increases this year. ECB Watch tool gives 64 percent odds of a hike at the April 29 meeting.

At its March 19 session, the ECB held rates but raised 2026 overall inflation forecasts to 2.6 percent due to war-driven energy costs. ECB President Christine Lagarde described a markedly uncertain economic backdrop.

Markets caught a brief lift Thursday evening when President Trump extended Iran's deadline to reopen the Strait of Hormuz by 10 days to April 6. Trump had threatened to destroy Iranian power infrastructure within 48 hours unless the strait reopened; he first issued the warning March 22. Trump posted on social media that Iran requested the extension and talks proceed very well.

Bloomberg Television reported Friday morning that US and European futures pointed higher on the news. That relief faded against a broad monthly drop, the worst for global stocks since 2022.

Diplomatic moves coincide with rising US military presence. Reuters and Associated Press report about 2,500 Marines deployed alongside extra warships as the conflict enters a riskier phase, per officials. Axios said Thursday the Pentagon readies options for a potential endgame, including seizing key Iranian islands and striking nuclear sites, though no decision exists.

Strait of Hormuz closure has spiked oil prices since fighting began February 28. Brent topped $120 per barrel at peak. The Stimson Center warns prolonged disruption could remove 8 to 10 million barrels daily from global supply, rippling to fertilizer markets, marine insurance and Asian energy costs.