European stocks muted as investors gauge US interest rate outlook

By Sukriti Gupta, Sanchayaita Roy and Pranav Kashyap

June 26 (Reuters) - European stocks seesawed throughout Thursday before closing largely flat, as investors weighed the latest signals on the U.S. interest rate trajectory.

The pan-European STOXX 600 index .STOXX closed up 0.09% at 537.48 points. Other regional indexes also followed suit with similar moves, with only Germany's DAX .GDAXI up 0.6%.

Federal Reserve Chair Jerome Powell suggested in his congressional testimony this week that if not for inflationary pressures tied to the Trump administration's tariffs, the central bank might have kept cutting rates.

U.S. President Donald Trump stepped up his criticism of Powell and hinted at a shortlist of potential replacements, while the Wall Street Journal reported that a shake-up could come as early as September.

Markets are now focused on the July 9 U.S. tariff pause deadline. With trade talks largely stalled — apart from a U.S.-UK agreement — the European Union is trying to clinch its own deal with Washington. EU leaders, meeting on Thursday, must decide whether to opt for a quick accord, or dig in for a tougher fight.

"We haven't heard much about a deal between U.S. and Europe and as we approach closer to the tariff deadline, it's becoming more of a risk factor for Europe," said Anthi Tsouvali, multi-asset strategist at UBS Global Wealth Management.

Against this backdrop, the STOXX 600 was on track for its first weekly gain in three weeks, buoyed by optimism that the fragile truce between Iran and Israel will hold.

Among sectors, European defence .SXPARO rose 3.1%. NATO leaders on Wednesday backed the big increase in defence spending that Trump had demanded.

Industrial miners .SXPP led sectoral gains, jumping nearly 4% - logging their biggest intraday percentage gain in over a month, buoyed by copper prices that were near three-month highs. MET/L

Rheinmetall RHMG.DE and Airbus AIR.PA jumped 7.3% and 2.7%, respectively. Saab SAABb.ST rose 6.3%, while QinetiQ QQ.L was up 7.3%.

Conversely, consumer-focused stocks were the biggest drag on the index, with the luxury sector .STXLUXP and personal and household goods .SXQP dropping more than 1.4% each.

Inchcape INCH.L rose nearly 6% after the car distributor reiterated its full-year financial outlook.

Edenred EDEN.PA advanced 6.3% after a French minister gave an update on a proposed meal voucher reform.

On the data front, German consumer sentiment is set to edge lower heading into July as households' increased willingness to save counteracts improving income prospects.