London’s blue-chip index closed firmly in positive territory on Thursday, rising 174 points to finish the session at 10,652.
The gains came after US non-farm payrolls for June came in well below expectations, with just 57,000 jobs added against forecasts of 115,000.
The unemployment rate fell to 4.2%, partly driven by a drop in the participation rate, which added a further layer of complexity to the report.
IG chief market analyst Chris Beauchamp said: “It might be the US that’s looking forward to a long weekend, but European markets have got in on the act today following the payrolls data.”
Beauchamp added that “the weaker figure sent the dollar reeling and saw Fed rate hike bets reined in,” with the VIX volatility index slumping sharply as a result.
The market is now pricing 31 basis points of cumulative rate hikes by December, down from 37 basis points just before the payrolls data was published.
ING economist James Knightley said the numbers “suggests that this was not necessarily the start of a new trend and takes some out of the wind of the sails for the call for imminent rate hikes.”
However, Knightley noted that Fed chair Kevin Warsh “has made it clear that inflation is the Fed’s focus right now, so market reaction is somewhat muted.”
ING continues to expect a “prolonged pause from the Federal Reserve rather than expect a 2026 rate hike,” according to Knightley’s assessment of the current policy environment.
Gold was among the biggest beneficiaries of the dollar’s retreat, surging 2.1% to $4,118 an ounce as the greenback weakened across the board.
Beauchamp said of gold: “A weaker dollar makes life much easier for the dip buyers, though sentiment has been heavily battered by the repeated false dawns of the long retreat from $5,000.”
The FTSE 100 hit its highest level since the Iran war broke out, briefly surpassing the 200-point gain threshold during afternoon trading.
Defence stocks led the charge on the London index, with BAE Systems and Babcock both rising more than 6%, while Melrose and Rolls-Royce also advanced strongly.
Defensive heavyweights including AstraZeneca, GSK, Tesco and Haleon also posted strong gains, alongside a rebound in miners led by Antofagasta.
Germany’s DAX outperformed its London counterpart, surging 2.3% compared to the FTSE 100’s 1.7% jump, with the index hitting its first record high in six months.
The pound rose 0.66% against the dollar while the euro gained 0.55%, as the greenback slipped following the softer-than-expected payrolls print.
Across the Atlantic, the Dow Jones opened 0.8% higher at 52,709, with Nike leading the index higher after rebounding from its earnings-driven drop the previous session.
Capital.com market analyst Fawad Razakzada said: “The stock market liked the data and the dollar hated it because it effectively rules out the chances of a July rate hike from the Fed.”
Not all stocks participated in the rally, with Currys shares falling 4% to 157.1p after analysts described its new £50 million share buyback as conservative given the company’s £176 million net cash position.