The US central bank has implemented another expected 0.25% increase in interest rates, possibly marking the culmination of this significant tightening cycle. The Fed's target rate has now reached 5.25% - 5.50%, the highest in 22 years. Despite a notable drop in US inflation to 3%, potential risks persist as the economy continues to outperform and the job market remains tight.

Similarly, the European Central Bank has raised rates by 0.25%, setting the key deposit rate at 3.75%. The message conveyed by the move has divided the markets on whether there will be another hike in September or if we have already reached the peak. Economic data for this week indicates a weakening of growth conditions and business expectations, which accentuates the dangers of excessive tightening, potentially leading the economy into a recession.

In the UK, all eyes are on the upcoming Bank of England meeting. Market sentiment leans toward a 0.25% rate increase, although the possibility of a 0.50% hike is still on the table. The data released this week has been below expectations, including the vital services sector, and no further significant releases are expected before the decision next week. Forecasts suggest more rate hikes in the following months, possibly raising the Bank rate to 5.75% by the end of the year.

On the currency exchanges, the strength of the dollar due to robust US growth data has caused the pound sterling to pull back slightly from its recent highs, but it remains trading up around 1.1700 against the Euro.

Eurozone interest rates have surged to their highest level in 22 years, as the European Central Bank signals its intent to further raise borrowing rates to a record high in the upcoming months. The headline deposit rate has been pushed to 3.75 percent, matching the 2001 record, with President Christine Lagarde expressing her willingness to take even more measures to bring down inflation from the current 5.5 percent.

Ms. Lagarde stated, "Our aim is to tackle inflation relentlessly. We are determined to reach our 2 percent target, no matter what it takes."

Despite a decline from the peak of 11.5 percent in October, inflation is still expected to remain persistently high, prompting speculations of more rate hikes in the foreseeable future.

The European Central Bank's rate increase follows a similar move by the US Federal Reserve, which pushed its Federal Funds Rate to a range of 5.25 percent to 5.5 percent, also the highest rate in 22 years.

Economists anticipate further rate adjustments by the Fed's chairman, Jerome Powell, after surprising data on Thursday revealed a growth spurt in the US economy. GDP growth accelerated to an annualized pace of 2.4 percent in the second quarter, up from 2 percent in the preceding three months, defying earlier predictions of a slowdown. The resilience of the world's largest economy led to a decline in the value of the pound against the dollar, with Sterling falling 0.5 percent to $1.285 as traders considered the likelihood of additional Fed rate hikes.

UK inflation drops below 8% for the first time in over a year, sparking hope that the worst may be behind us. Core inflation, a crucial metric for the Bank of England, also decreased to 6.9%.

With signs of a softening job market, the Bank might choose a more modest 0.25% rate hike in August, though a larger 0.50% increase remains a real possibility. Despite the positive data, inflation still significantly overshoots the 2% target. Markets now predict the peak interest rate to be just above 5.75% by year-end. Nevertheless, the Bank faces the enormous challenge of reducing inflation without causing long-term damage to the economy.

In the US, all eyes are on the upcoming central bank meeting, where the Fed is expected to implement another 0.25% rate hike, bringing rates to 5.50%. This is likely to mark the peak of this historic tightening cycle, as US inflation is anticipated to fall to 3%.

This week, the European Central Bank is also convening, with a projected 0.25% rate increase, and further expectations for one more hike in September, reaching the probable peak.

Global market sentiment is impacted by concerns over the strength of the Chinese economy, as growth data continues to disappoint.

On the foreign exchange market, the British pound reached its highest level against the dollar in over a year, touching 1.3150, before retreating due to the drop in UK inflation. Meanwhile, GBP/EUR hit a new year-to-date high of 1.1750 before experiencing a sharp decline towards the 1.1500 level, as the market adjusted its expectations regarding the peak in UK interest rates.

The GBP/USD experienced a significant drop following the release of inflation figures in the UK, extending its losses in the North American session and briefly touching the 20-day EMA below the 1.2900 level. However, soft economic data from the US led to a recovery above this level, with the current trading price at 1.2914, representing a loss of 0.93%.

The recently revealed key economic data in the UK provided some relief for the Bank of England (BoE), which had been facing pressure due to its inability to achieve price stability for British households. The inflation figures for June indicated that price pressures are easing, aligning with the trends in the US economy. The Consumer Price Index (CPI) came in at 7.9% YoY, lower than the expected 8.2%, and significantly below May's 8.7%. Meanwhile, the core CPI rose by 7.3% YoY, lower than May's 7.9%.

As a result of the data, expectations for a 50 bps tightening by the BoE decreased to 45% from being fully priced in since Monday. The swaps market now estimates 25 bps rate hikes in September and November, with Bank Rates expected to peak at 5.75%-6.00%. This repricing of rates in the UK caused the GBP/USD to plummet by nearly 1%, equivalent to more than 110 pips.

On the other side of the Atlantic, economic data from the United States showed that the housing market, while still recovering, experienced a slowdown. The latest data from the US Department of Commerce revealed an -8.0% MoM decline in Housing Starts, following an impressive 21.7% increase in May, the highest growth rate in 11 months. Building Permits also dropped by -3.7% compared to the previous month, contrasting with May's growth of 5.6%.

Speculators currently believe that the US Federal Reserve (Fed) is nearing the end of its rate-raising cycle, as the CME FedWatch Tool indicates a 99% probability of a 25 bps hike in July, but no further increases are expected. The first Fed rate cut is anticipated in March 2024.

Despite today's weakness, the GBP/USD might continue to trade with an upward bias, driven by the expectation that interest rates in the UK will remain higher than in the US. This could lead to further strength in the Pound Sterling (GBP) if recessionary concerns surrounding the UK economy subside. However, if the UK falls into a recession, the safe-haven status of the US dollar could weigh on the GBP/USD pair.