Investor Caution Ahead of Critical U.S. Fed and BoE Decisions Shakes British Markets

British stock indexes experienced a dip as investors adjusted expectations for interest rate cuts by the Bank of England. The FTSE 100 and midcap stocks declined amid steady UK inflation and rising services costs. The British pound saw gains, while U.S. stocks also fell ahead of a Federal Reserve policy decision.

British stock indexes dropped on Wednesday as investors reined in bets on potential interest rate cuts by the Bank of England. The market activity reflects fragile global sentiment ahead of the U.S. Federal Reserve's policy decision later in the day.

The FTSE 100, a blue-chip index, ended the day 0.7% lower, recording the steepest losses among its European counterparts. An index of midcap stocks also declined by 0.5%, both closing at their highest levels since early September just the day before. UK annual consumer price inflation remained steady at 2.2% in August according to forecasts, while services inflation - closely monitored by the Bank of England - rose to 5.6%, slightly above expectations.

The rise in the British pound against the dollar added pressure on the FTSE 100's export-focused companies. Persistent inflationary pressures led traders to reduce their bets on a rate cut by the Bank of England at its upcoming meeting, where policymakers are expected to maintain the current rates.

Meanwhile, U.S. stocks also edged lower with investors adopting a cautious stance ahead of the Federal Reserve's policy announcement, widely predicted to kickstart its policy easing cycle. Futures prices now show a 55% chance of a 50-basis-point rate cut, up from 14% just a week earlier, as per CME's FedWatch tool.

Among corporate developments, Reckitt Benckiser saw a 1.2% rise in its stock following media reports of early discussions with potential buyers for its homecare assets. Losses were broad-based across sub-sectors, except for defense and telecoms.

(With inputs from agencies.)