European stocks fell sharply at the open on Tuesday, as initial enthusiasm over the US-Iran peace deal quickly faded, replaced by renewed concern about a longer-term high interest rate policy.

The pan-European STOXX 600 index fell by 1.00%, while Germany's DAX index declined by 1.30%. France's CAC 40 and Italy's FTSE MIB both recorded a 1.00% drop.

London's FTSE 100 index fell by 0.70%. Markets continue to assess the political fallout from Prime Minister Keir Starmer's resignation. However, analysts noted that the muted reaction reflects market acceptance of the frontrunner, Andy Burnham.

European stocks are holding near record highs as investors shift their focus from Middle East peace headlines to the inflationary fallout from a three-month conflict whose ripples continue to reverberate globally.

The main concern revolves around the extent of the damage already reflected in consumer prices, and the number of additional interest rate hikes the European Central Bank may be forced to implement.

The European Central Bank has raised interest rates once this year, and markets are anticipating another move in the second half of the year.

Traders are awaiting the June Purchasing Managers’ Index (PMI) data due later today as a key indicator of activity in the Eurozone, following comments from European Central Bank President Christine Lagarde who confirmed that the inflation shock is significant, but not yet sufficient to destabilize long-term expectations.

She stressed that there is no evidence of expectations losing their relevance to the goals or of second-order effects that would warrant a more severe policy response.

The initial enthusiasm surrounding the US-Iran peace agreement quickly led to a more hawkish stance from the Federal Reserve, keeping global markets volatile as investors sought to reprice the risks of a tightening Fed monetary policy.

For European stocks, the upcoming earnings season is likely to be the next major driver, with analysts warning that stocks may remain in a wait-and-see mode until corporate results are released, despite their high levels.

On the individual stock level, Heineken shares rose by 1.50% following the appointment of Rafa Oliveira as CEO of the company.