European stock exchanges fell as investors price in expectations of the Fed's tighter policy.

European stock exchanges retreated on Friday, halting the gains recorded over the previous four trading sessions. Investors' attention has shifted to the US Federal Reserve's expected tighter monetary policy and uncertainty in the artificial intelligence sector.

The pan-European STOXX 600 index fell 0.2%, pulling back from the record high set the previous day. Germany's DAX dropped 0.3%, while France's CAC 40 declined 0.2%. London's FTSE 100 remained virtually unchanged.

Pressure on the markets is being reinforced by expectations of rising global borrowing costs and the geopolitical situation in the Middle East. At the same time, investors are awaiting new economic growth data from the eurozone.

European market still leads on weekly performance

Despite Friday's decline, the STOXX 600 is up approximately 2.4% for the week, putting it on track for its best weekly performance since June.

The relative resilience of European markets is attributable to their sectoral structure. Unlike US and Asian tech stocks, European indices have a smaller share of mega-cap technology companies. As a result, the region has proven relatively insulated from the sharp swings caused by capital movements in the artificial intelligence sector.

A strong third-quarter corporate earnings season is also supporting this trend. An additional positive factor is the decline in oil prices, now in its second consecutive week, which is easing pressure on European companies' operating costs.

"Investors should try to ride the market's upward wave before it breaks. There's a very big wave in the AI sector right now," said Sean Peche, founder and portfolio manager at Ranmore Fund Management. He noted that investors often assume that assets which performed well in the past will continue to deliver the same results in the future, though history also offers plenty of counterexamples.

Fed rate expectations are tightening

In global bond markets, investors are actively revising their expectations for the Fed's final monetary policy meeting of the year. Following higher-than-expected October inflation figures and hawkish statements from central bank officials, the market has now fully priced in a 0.25 percentage point rate hike in December.

In addition, the probability of a sharper 0.50 percentage point increase has risen to about 15%. Just last week, such a scenario was considered almost out of the question.

The geopolitical situation is adding further uncertainty. US President Donald Trump stated that Washington no longer needs a formal diplomatic agreement with Tehran. According to him, the US has gained significant financial leverage over Iran and has established control over the Strait of Hormuz — one of the most critical routes for global energy supply.

Investors await economic data

Further market dynamics will be influenced by preliminary third-quarter GDP data from the eurozone. Economists expect the region's economy to have grown 0.4% quarter-on-quarter, marking a slowdown from the 0.6% growth recorded in the previous quarter.

Investors will also closely watch statements from European Central Bank (ECB) Executive Board members Frank Elderson and Isabel Schnabel for additional clues on the future direction of monetary policy.

Also in focus during the day will be US Producer Price Index (PPI) data, which reflects wholesale inflation trends. Later, remarks from Fed officials Susan Collins and Lorie Logan are scheduled. Their statements could influence market expectations, particularly regarding the possibility of a 0.50 percentage point rate hike.