The US Federal Reserve implemented an expected 0.25% interest rate hike last week, potentially marking the culmination of its historic tightening cycle. As inflation subsides and the risks of recession and slowed growth loom, future projections anticipate rate cuts later in the year.

Similarly, the European Central Bank raised its key rates by 0.25%, displaying a particularly hawkish stance. With subsequent increases anticipated in the coming months, the ECB's tightening cycle began later and from a lower starting point.

Looking ahead, the Bank of England is scheduled to announce its decision this week, with market expectations pointing towards a 0.25% increase, resulting in a 4.50% interest rate. The vote on this matter is likely to be divided. Analyst opinions diverge on whether this hike will be the final one or if rates will continue to rise as conflicting economic signals persist.

The upcoming week holds significant economic data, including UK growth figures and the latest US inflation numbers, which will contribute to market volatility. 

Concerns about the stability of the US banking system and escalating worries regarding the debt ceiling exert a negative influence on market sentiment.

Regarding currency exchanges, the weakening US dollar remains the primary driving force. As the Federal Reserve reaches the peak of its interest rate trajectory and concerns about the banking system persist, the interest rate differentials between currencies continue to diminish. These factors contribute to the British pound surging to its highest level of the year, surpassing the 1.2600 threshold.

Finally, very many congratulations from the Monfor team to His Majesty, King Charles III on a fantastic coronation. 

The European Central Bank on Thursday increased its benchmark interest rate by 25 basis points as it continues to fight a surge in consumer prices, with rates now at levels not seen since November 2008.

The decision comes after inflation figures released earlier this week showed an increase in the headline rate to 7% for April. At the same time, core inflation, which excludes food and energy prices, decreased slightly to 5.6%. "Headline inflation has declined over recent months, but underlying price pressures remain strong," the central bank said Thursday.

The ECB embarked on its current hiking path in July 2022, when it brought its main rate from -0.5% to zero. However, despite consistent rate increases since, inflation remains well above the ECB's target of 2%. Estimates published last week by the International Monetary Fund suggest that inflation will not reach the ECB's target until 2025.

Recent data also shows that the euro zone economy grew less than expected in the first quarter of the year, registering an anaemic GDP of 0.1%. However, unemployment numbers showed a slight improvement in March from the previous month at 6.5%.

Furthermore, a recent ECB survey showed that banks have significantly tightened access to credit, which could suggest that higher interest rates have started to take its toll on the real economy.

Across the pond, the Federal Reserve unanimously voted to increase interest rates for the tenth consecutive time, in keeping with their monetary tightening policy. This move has officially brought US interest rates into the 5% to 5.25% range, marking their highest point since August 2007.

The decision of the May meeting was closely watched, as analysts and experts alike believed it would be the final interest rate hike. Fed chairman Jerome Powell stated that no decision on a pause had been made, but investors noted the softer language used in the Fed's statement regarding future rate hikes. The statement read, "the Committee anticipates that some additional policy firming may be appropriate."

The Fed's decision on interest rates in the June meeting may be influenced by incoming data on jobs, the consumer price index, and inflation. However, Powell indicated that the Fed is unlikely to introduce any rate cuts in 2023 as inflation is expected to take some time to stabilize.

As we approach important central bank meetings and analyze the prospects for monetary policy, market volatility remains high. Analysts are focusing on whether interest rates will peak and if the ongoing historic tightening cycle is coming to a close.

The Bank of England is expected to raise rates by 0.25% in May, following recent economic data. However, there is much debate on whether this will be the peak or if further tightening will be necessary in the coming months due to conflicting signals from the underlying economy.

In the US, the central bank is expected to hike rates one last time this week before cutting rates later this year. This change in focus from inflation to recession is expected.

The European Central Bank is also likely to raise rates at this week's meeting, although analysts are divided on whether it will be a 0.25% or 0.50% move. Recent comments from officials indicate that the committee is becoming more divided.

On the exchanges, the US dollar remains weak due to concerns about the banking system and the US debt ceiling as the Fed reaches peak interest rates. GBP/USD is trading near its recent highs at the significant 1.2500 level, while GBP/EUR is trading near its monthly lows, reflecting a generally stronger Euro.

Following last week's economic data, market analysts are anticipating further rate hikes from the Bank of England. A 0.25% increase in rates is fully expected in May, with the projected peak now raised to nearly 5% later this year, which is likely to have a negative impact on UK market sentiment.

Inflation remains a concern, with headline inflation disappointing at 10.1%, and average earnings higher than expected at 5.9% or 6.6% excluding bonuses. This has contributed to the ongoing squeeze on disposable income.

Last week's retail sales figures showed a year-on-year drop of 3.1%. Meanwhile, in the US, the Fed is also expected to raise rates by 0.25% next month, with the consensus view being that this would be the peak, and rate cuts may be needed later this year as the focus shifts from inflation to growth.

The European Central Bank is currently the most hawkish, having started the tightening cycle later and from a lower base. Further rate increases are expected in the coming months as the bank remains fully focused on the challenging inflationary outlook.

Although sterling has been the best performing G10 currency this year, concerns about the UK economic outlook have overshadowed the repricing of UK rate hikes this week. GBP/USD remains close to its recent highs towards 1.2500, largely driven by a weaker dollar with US interest rates expected to peak first.

With a relatively quiet data calendar this week, the upcoming central bank meetings will be the main focus.