British equities moved lower on Thursday, tracking declines across European markets after a renewed exchange of military strikes between the United States and Iran weakened hopes for a diplomatic breakthrough in the Middle East. Investor sentiment was also pressured by warnings from the European Central Bank that energy-driven inflation risks may remain elevated for longer than markets currently expect.
By 07:26 GMT, the FTSE 100 had dropped 0.92%, while Germany’s DAX declined 0.34% and France’s CAC 40 slipped 0.41%. Sterling also weakened slightly, falling 0.18% against the U.S. dollar to $1.3402.
Fresh Military Escalation Raises Regional Tensions
Market anxiety intensified after the U.S. military confirmed it had carried out new defensive strikes near Bandar Abbas on Wednesday. According to U.S. officials, the operation targeted a ground control station believed to be preparing drone launches against commercial and military vessels operating in the Strait of Hormuz.
Iran’s Revolutionary Guards responded early Thursday, claiming they had struck the U.S. air base used to launch the attack. Kuwait later reported that its air defence systems had intercepted missiles and drones, marking one of the most direct exchanges between the two sides in recent days.
Diplomatic Progress Overshadowed by Conflict
The latest military escalation overshadowed earlier signs that diplomatic efforts might be gaining traction.
Speaking during a Cabinet meeting, U.S. President Donald Trump said Iran was “negotiating on fumes,” while adding, “maybe we have to go back and finish it, maybe we don’t.”
Secretary of State Marco Rubio also indicated there had been “progress and interest” toward a possible agreement, stressing that diplomacy remained Washington’s preferred course of action.
Meanwhile, the White House dismissed Iranian state television reports claiming that a draft “Islamabad Framework” agreement existed under which Tehran would oversee shipping transit through the Strait of Hormuz, describing the report as “a complete fabrication.”
Tehran Maintains Hard-Line Position
Further uncertainty emerged from comments made by senior Iranian officials.
Iran’s Supreme National Security Council stated that the country’s enriched uranium stockpile remained outside the scope of negotiations, while a senior Iranian lawmaker warned that even a U.S. agreement “would not mean the end of the war.”
Deputy foreign minister Ali Bagheri Kani also reiterated demands that all frozen Iranian assets be returned “fully and unconditionally,” a condition that President Trump has already rejected.
ECB Warns Energy Inflation Could Persist
Adding to investor concerns, ECB chief economist Philip Lane warned on Thursday that the energy shock linked to Middle East tensions could continue affecting inflation even if the conflict is resolved relatively quickly.
Speaking at a conference hosted by the Bank of Japan and its affiliated think tank in Tokyo, Lane cautioned about potential “second-round effects” as countries seek to rebuild energy reserves and diversify supply chains.
Financial markets are currently pricing in two additional ECB interest rate hikes, while expectations for a third increase remain roughly balanced.
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