Global stock markets are facing pressure due to central banks, notably the Federal Reserve, asserting that they will keep interest rates elevated for an extended period. This has led to US Treasury yields reaching their highest levels in several years. Additionally, discouraging economic data from China is contributing to a risk-averse atmosphere, bolstering the strength of the US dollar.

In the United Kingdom, the market is factoring in the likelihood of one more interest rate hike as the Bank of England grapples with exceptional challenges, including persistently high inflation, a tight labor market, and the drag of high interest rates on demand. Rising oil prices and a weakening pound, which make imports more costly, are exacerbating inflationary pressures, heightening the risk of economic stagflation.

The US economy remains on a robust growth trajectory, driving the momentum of the US dollar. There is a genuine possibility of another interest rate hike in the coming months. However, there is also a looming risk of a government shutdown if Congress fails to reach a funding agreement in the next week.

In Europe, mounting concerns about a recession are exerting downward pressure on the euro and increasing the likelihood that interest rates have reached their peak following the recent increase. Markets are pricing in unchanged monetary policy until late 2024, at which point an initial rate cut is anticipated.

Across currency exchanges, the strength of the US dollar remains a significant driver of sentiment. GBP/USD has dipped to new 6-month lows around the 1.2200 level, while GBP/EUR has fallen to a 2-month low of 1.1500, where some initial demand is emerging.

According to the Office for National Statistics' latest report released on Friday, the UK economy exhibited stronger growth in the first quarter than initially projected. GDP expanded by 0.3% during the period from January to March, surpassing the previously estimated 0.1% growth. This upward revision brings the current GDP estimate to 1.8% higher than the levels observed before the onset of the pandemic in 2019.

Grant Fitzner, the chief economist at ONS, remarked, "The most recent data indicates that the GDP growth rate remains largely consistent with the data from the past 18 months. Our revised estimates suggest enhanced performance in the professional and scientific sectors, attributable to improved data sources. On the other hand, healthcare witnessed slower growth due to new real-time data revealing increased service delivery costs."

Furthermore, the GDP growth projection for the entire year of 2022 has been adjusted upward to 4.3% from the initial estimate of 4.1%. Meanwhile, the second-quarter growth rate remains unchanged at 0.2%.

Ruth Gregory, deputy chief UK economist at Capital Economics, offered her perspective, stating, "In summary, today's release has minimal impact on the overall economic landscape. The data indicates that the economy is only 0.6% above its level from a year ago. This underscores the fact that, compared to other G7 nations, excluding Germany and France, the UK has struggled in its economic recovery since the onset of the pandemic. All of this occurs in the context of impending challenges related to rising interest rates."

The Bank of England opted to maintain its interest rates at 5.25% during this week's meeting. They emphasized that the possibility of further tightening remains under consideration, and these rates are expected to persist at elevated levels for an extended period. The decision to hold rates was narrowly favoured by a 5-4 vote, and most experts now anticipate that rates will remain at this level well into the following year.

The committee observed growing indications that the aggressive series of rate increases has started to impact both the job market and the economic growth prospects. Moreover, a significant portion of the rate hikes from the past year has yet to fully affect borrowers.

In the United Kingdom, inflation unexpectedly dropped to its lowest point in 18 months, with the headline rate decreasing to 6.7%. Nevertheless, this level remains uncomfortably high and considerably exceeds the 2% target.

Meanwhile, the United States' central bank also opted to keep its policy unchanged. Although the possibility of another rate hike later in the year is still on the table, most forecasters believe that rates have already reached their peak. The decision to maintain the current policy was unanimous, and the Federal Reserve indicated that rates are likely to remain elevated well into the following year.

In Europe, it appears that the central bank has probably reached the peak of its rate increases, following the hike that occurred last week. The current monetary policy is expected to remain unchanged until late 2024, at which point an initial rate cut is anticipated.

Regarding currency exchange markets, the strength of the US dollar continues to drive market dynamics. GBP/USD is now trading at new 6-month lows below 1.2300, while GBP/EUR has fallen to the lower end of the well-established range of 1.1500 to 1.1750.

GBP faced a sharp decline against both the EUR and the USD following the Bank of England's announcement of an end to interest rate hikes. After the news that interest rates would remain unchanged, the GBP's value dropped by 0.6 percent, settling at approximately £/$1.2270.

This decline in GBP's value was exacerbated by the Federal Reserve's recent decision to maintain its current interest rates, accompanied by hints of potential rate increases later in the year. In contrast, the Bank of England's communication indicated a lack of enthusiasm for further interest rate hikes, leading market speculators to anticipate interest rate cuts sooner than previously expected.

Unlike the Federal Reserve, which has managed market expectations by signalling its stance on rate hikes without actually implementing them, the Bank of England appeared resigned to the market's shift towards anticipating rate cuts. This marked a departure from its previous stance and sent a clear signal that a rate cut was on the horizon.

It's important to note that this belief may be premature, given the persistently high levels of inflation in the UK and the tight labour market. Nevertheless, this shift underscores the Bank of England's inclination towards a more "dovish" monetary policy, which typically weakens the value of the Pound.

Throughout 2023, currency markets had been bullish on GBP as the Bank of England had been raising interest rates and increasing the yield on UK bonds, providing the currency with a competitive advantage. However, this advantage is expected to wane as investors anticipate forthcoming rate cuts, putting downward pressure on the Pound's value.

The conclusion of the interest rate hike cycle may ultimately benefit the UK's economic outlook, especially if the Bank's prediction of inflation returning to the 2.0 percent target within the next three years holds true. With the Bank Rate now lower than market expectations for much of the past year, financial conditions in the UK are expected to become more accommodating for households and businesses, potentially supporting economic growth.

In the short term, however, economic data is showing negative surprises, and it may take some time for positive surprises to emerge, leaving room for further weakening of GBP. Nonetheless, if the currency market begins to reward economic outperformance, as suggested by some analysts, this could provide support for GBP in the medium term.