Fed's Dovish Pivot Propels European Markets to Multi-Week Highs on Easing Hopes

European equities surged to multi-week highs on September 18, 2025, as investors reacted positively to the U.S. Federal Reserve's decision to cut interest rates for the first time since December 2024. The Fed reduced its benchmark rate by 25 basis points to 4.00%-4.25%, signaling a dovish pivot amid slowing job creation and a slight uptick in unemployment. This shift, coupled with projections of further easing, bolstered risk appetite across European markets. The euro held firm near a four-year peak, trading at $1.1830, while the pan-European STOXX 600 rose 0.7% and Germany's DAX climbed 1.2%. Tech and banking sectors led gains, with SAP, ASML, and Schneider Electric rising 3.3%, 2.6%, and 2.5%, respectivelyEuro holds at 4-year highs, European equities soar on Fed's dovish cut^[1].

The Fed's updated "dot plot" projected a target rate of 3.6% by year-end 2025, implying two additional 25-basis-point cuts this year. Rates are expected to decline further to 3.4% by 2026 and 3.1% by 2027Euro holds at 4-year highs, European equities soar on Fed's dovish cut^[1]. Markets priced in at least two more rate cuts by year-end, with ING economist James Knightley forecasting easing in October, December, and early 2026. However, six Fed policymakers opposed further cuts in 2025, citing stronger growth and sticky inflation, while BBVA strategist Alejandro Cuadrado noted divergent views on economic projectionsEuro holds at 4-year highs, European equities soar on Fed's dovish cut^[1].

Sectoral performance highlighted the market's optimism. European bank shares advanced 1.2%, with Banco Santander and Commerzbank up around 1%. France's CAC 40 and Spain's IBEX 35 also rose, though Italy's FTSE MIB remained near flat. Tech and industrial stocks, including ASML and Siemens, benefited from lower borrowing costs, which typically favor growth-oriented assets. Meanwhile, defense stocks rebounded 1.4% amid geopolitical tensions and diplomatic developments involving the Russia-Ukraine conflictEuropean Markets Surge As Fed Rate Cut Expectations Bolster …^[3].

The euro's strength, while easing imported inflation, raised concerns about export competitiveness for manufacturing-heavy economies like Germany. However, the broader market mood remained upbeat, as a Fed committed to preemptive easing was seen as supportive for global risk assets. Danske Bank maintained a cautious stance, anticipating only one more rate cut this year, citing improved U.S. credit growth and business inventories as signs of economic resilienceEuro holds at 4-year highs, European equities soar on Fed's dovish cut^[1].

Analysts emphasized the Fed's shift from a restrictive to a neutral stance as a key driver. Fed Chair Jerome Powell framed the cut as a "risk management" measure to support the labor market before a potential downturn. Despite dissenting voices, the central bank's signals of a faster easing cycle reinforced investor confidence. Looking ahead, markets will closely monitor the Bank of England's rate decision later in the day and the implications of the Fed's policy trajectory for European Central Bank (ECB) strategyEuro holds at 4-year highs, European equities soar on Fed's dovish cut^[1].