From Threadneedle Street to Washington: What’s Next for Markets?

September has already delivered a flurry of central bank decisions and market headlines, setting the tone for the final quarter of the year. From Westminster to Washington, and from Frankfurt to Beijing, the policy backdrop is shifting with implications for currencies, equities, and bonds.

This week we start in the UK, where the Bank of England has hit pause, before turning to the eurozone outlook, the US Federal Reserve’s long-awaited rate cut, and Asia’s diverging fortunes.

UK - BoE cautious as inflation proves sticky

The Bank of England’s Monetary Policy Committee voted 7–2 to leave interest rates unchanged at 4% this week, maintaining a cautious stance as headline inflation held steady at 3.8% in August. Governor Andrew Bailey was clear: inflation is heading towards target, but “we’re not out of the woods yet.”

Alongside holding rates, the BoE slowed the pace of quantitative tightening, reducing annual gilt sales from £100 billion to £70 billion. The move is partly aimed at limiting disruption to the gilt market at a time when long-term yields are already elevated.

The economic picture remains mixed. Wage growth edged higher to 4.7% (well above the 3% rate viewed as consistent with the 2% inflation target), while payroll data showed the seventh consecutive monthly fall in the number of employees. That suggests the labour market is cooling, but not yet enough to eliminate inflationary pressures.

Sterling weakened slightly against the euro following the BoE’s decision, and the FTSE 100 slipped 0.7% on the week. For investors, the message is one of patience: interest rate cuts will come, but likely in smaller, more measured steps than markets might like.

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Europe - ECB on hold, political and trade risks linger

The European Central Bank also opted to leave policy unchanged, holding its deposit rate at 2%. President Christine Lagarde repeated her line that the eurozone is “in a good place,” but markets remain unconvinced the easing cycle is finished. Analysts argue that euro strength, US tariff risk, and ongoing uncertainty in France could yet prompt further action in 2026.

Meanwhile, data showed eurozone industrial production bouncing back by 0.3% in July, helped by stronger output in capital and consumer goods. Germany remains the swing factor: exports to the US dropped nearly 8% as tariff effects set in, while domestic factory orders fell sharply. Political instability in France also continues to weigh, with President Macron forced to install a new prime minister after losing a confidence vote over budget plans.

European equities were little changed on the week, with the STOXX 600 index edging lower. Sector leadership continues to favour more defensive and domestically oriented stocks over exporters, which remain vulnerable to both trade and currency headwinds.

United States - The Fed finally cuts

Across the Atlantic, the Federal Reserve delivered its first interest rate cut since December, trimming its policy rate by 0.25% to a range of 4.75–5.00%. The decision was near unanimous, with only one policymaker pushing for a larger 0.50% move.

The cut follows months of softer jobs data. Policymakers acknowledged that “job gains have slowed” and that risks to employment are rising. Importantly, the Fed’s updated projections point to another 0.50% of cuts by year-end, with more easing pencilled in for 2026–27.

Markets welcomed the move. The S&P 500 and Nasdaq both hit record highs, buoyed further by optimism around artificial intelligence. Small-cap stocks outperformed, with the Russell 2000 up over 2% on the week - a reminder that lower borrowing costs can disproportionately benefit domestically focused firms.

Not all was rosy, however. Housing data were weaker, with starts down 8.5% in August and builder sentiment still subdued. Long-dated Treasury yields rose following hawkish comments from Chair Jerome Powell, who stressed that cuts will remain “gradual and conditional.” The US curve steepened, reflecting easier short-term policy but lingering long-term inflation concerns.

What It Means for You

For UK private investors, three messages stand out this week:

1. BoE patience is the watchword. Inflation is easing, but with wages still running hot, cuts will be gradual. Sterling may remain soft against the euro, and gilts could benefit from slower BoE bond sales.

2. Europe faces a fragile equilibrium. Growth is holding up better than feared, but trade tensions and political risks still cast long shadows. Selectivity in European equities remains crucial.

3. The Fed has turned a corner. US rate cuts are supportive for equities in the short term, but higher long-term yields and stretched valuations argue for balance - especially with AI enthusiasm driving narrow leadership.

The broader message is clear: central banks are easing, but cautiously. The cost of capital remains high, and earnings growth is far from guaranteed. A globally diversified portfolio, balancing equities with quality fixed income, continues to be the most resilient way to navigate this environment.