The European Central Bank (ECB) increased interest rates by a quarter of a percentage point on Thursday, signaling another hike for the following month, despite indications of a mild recession in the Eurozone consisting of 20 countries.

The ECB has been consistently raising rates at each meeting since July as a measure to combat inflation. This latest adjustment brings the benchmark rate in the Eurozone to 3.5%, the highest since May 2001.

Diverging from the US Federal Reserve's decision to pause its rate-hiking campaign after ten consecutive increases, ECB President Christine Lagarde expressed confidence in another rate hike occurring in July.

Lagarde stated that the ECB was not considering pausing and emphasized the need to further raise interest rates to achieve a sufficiently restrictive monetary policy. The ECB also highlighted in a statement that inflation, although declining, is projected to remain persistently high.

In May, consumer prices in the Eurozone rose by 6.1% compared to the previous year, marking the lowest level since the escalation of the Russia-Ukraine conflict that led to a surge in global energy prices.

While inflation has moderated, it still surpasses the ECB's 2% target, raising concerns about ongoing price pressures. The central bank revised its forecast for core inflation, citing "upward surprises" and a strong labor market, with expectations that it will reach 5.1% this year, up from the average forecast of 4.6% in March.

Lagarde attributed the increase in core inflation to wage growth, with average wages rising by 5.2% in the first quarter compared to the previous year. Despite stagnant output, companies have been raising prices due to rising labor costs per worker.

Although the Eurozone experienced historically low unemployment of 6.5% in April, Lagarde stated that ECB policymakers extensively discussed the labor market and would closely monitor further developments.

Nevertheless, the region's economy is beginning to feel the impact of higher interest rates and increasing prices, leading to a slight contraction around the start of the year.

The ECB adjusted its economic growth forecast, anticipating a growth rate of 0.9% for the year, slightly lower than its March projection.

The effects of previous rate increases are gradually permeating the economy, with borrowing costs rising steeply and loan growth slowing down, potentially strengthening the case for the central bank to pause its rate hikes in the near future.

However, the ECB foresees inflation remaining elevated for an extended period, leaving the door open for additional rate hikes beyond July.

Analysts, such as Claus Vistesen, Chief Euro Area Economist at Pantheon Macroeconomics, predict that the ECB will implement two more 25-basis-point rate hikes, in July and September, which would bring the deposit rate to 4%—what they believe will be the final rate adjustment.

The current focus in the market is primarily on the monetary policies of central banks. This week, the Federal Reserve and the European Central Bank are holding meetings, followed by the Bank of England next week.

Analysts are assessing the likelihood of another interest rate hike by the Federal Reserve this month or the next, placing it at less than 50%. The upcoming inflation data, to be released next week, will play a crucial role in determining the outcome. As inflationary pressures continue to ease, market expectations point towards rate cuts by the end of the year.

Regarding Europe, Christine Lagarde, the President of the European Central Bank, maintains a hawkish stance, and two more rate hikes are anticipated in the upcoming months as part of the ongoing effort to control inflation, despite a recent decrease.

The Bank of England faces arguably the most challenging situation, as UK inflation remains persistently high according to all measures. The market has already factored in four additional rate hikes, which would push rates above 5% by the end of the year. Given the UK housing market's sensitivity to higher interest rates, the economic outlook appears gloomy, and the risk of a recession looms large, despite conflicting data. The upcoming general election next year only adds to the overall uncertainty.

Global geopolitical tensions remain heightened and will continue to impact market sentiment for the foreseeable future.

In terms of trading activity, interest rate differentials continue to be crucial, with momentum driven by inflation and job data. The British pound (GBP) remains in high demand due to the anticipated interest rate outlook, leading to GBP/USD trading around 1.2550 and GBP/EUR near its highest level of the year above 1.1700.

The Bank of Canada (BoC) made a significant move on Wednesday, raising its overnight interest rate to a 22-year high of 4.75%. The decision was driven by concerns over an overheating economy and persistent high inflation. The central bank had been assessing the impact of previous rate hikes but concluded that its monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.

The Canadian economy has exhibited surprising strength in consumer spending, housing activity, and a tight labor market, signaling that excess demand is more persistent than initially anticipated. These factors led to the BoC's decision to increase interest rates, marking the fastest tightening cycle in the bank's history.

Following the rate hike, the Canadian dollar responded positively, appreciating by 0.4% against the US dollar. Money markets indicate a 60% chance of another rate hike in July, with further tightening already priced in for September. The market's reaction suggests expectations of continued monetary policy tightening by the BoC to address inflationary pressures.

The BoC's decision to raise interest rates was not entirely unexpected. However, the accompanying statement revealed the central bank's surprise and frustration with the reinvigoration of inflationary dynamics in the economy. The persistence of inflation despite previous rate hikes has raised concerns, prompting the BoC to take action.

In April, annual inflation accelerated to 4.4%, the first increase in 10 months. The BoC observed higher-than-expected prices for a wide range of goods and services, fueling concerns that inflation may not recede to the 2% target as rapidly as required. The central bank believes that further rate hikes are necessary to counter these inflationary pressures.

The impact of the interest rate hike on foreign exchange markets was notable. The Canadian dollar rallied, leading to a drop of a third of a percent in the US dollar to Canadian dollar exchange rate. Market expectations of future rate hikes are a driving force behind the Canadian dollar's strength.

Not only did the US dollar weaken against the Canadian dollar, but the pound also depreciated by 0.40% in the pound to Canadian dollar exchange rate. If the US dollar to Canadian dollar exchange rate reaches the projected level of 1.25, further depreciation of the pound against the Canadian dollar may occur.

The BoC's decision to raise interest rates reflects its commitment to combating inflationary pressures and achieving the 2% inflation target. The central bank will continue to assess economic indicators and inflationary dynamics to determine the need for additional rate hikes. The timing and extent of future rate increases will depend on factors such as inflation expectations, wage growth, and corporate pricing behavior.

Market participants and analysts anticipate further rate hikes in line with the BoC's goal of reducing demand and achieving the inflation target. The Canadian dollar's strength and the positive carry it offers make it an appealing option for investors. However, the ultimate impact of future rate hikes on both the domestic economy and foreign exchange markets remains to be seen, as it will depend on various economic factors and indicators.

As the BoC closely monitors economic developments, market participants eagerly await further updates and their potential implications for interest rates and the Canadian dollar.

The recent agreement on the US debt ceiling has provided some relief to global markets, and investors are once again paying close attention to central bank monetary policies.

In light of a disappointing inflation report, it is widely anticipated that the Bank of England will raise interest rates by an additional 0.25% this month. Market expectations suggest that rates may peak around 5.35% in the second half of the year. However, the negative consequences of higher interest rates on the economy are causing significant concern. There is an increased risk of a recession and growth may fall below projected levels.

In the United States, there is a mixed sentiment among market participants regarding whether there will be one final rate hike. Inflation has proven to be persistent, leading to uncertainty about whether interest rates have already reached their peak. As a result, interest rate cuts have been postponed until early next year.

Despite inflation slowing to a lower-than-expected 6.1%, the European Central Bank remains relatively hawkish. However, the market has adjusted its expectations for rate hikes, with two more increases anticipated in the coming months.

Weaker growth data from China is currently impacting global risk sentiment across different asset classes.

Interest rate differentials are currently driving momentum in the foreign exchange markets. The Euro is weakening due to a softened rate outlook. The GBP/EUR pair continues to reach new year-to-date highs above the 1.1600 level, while the GBP/USD pair has made a strong recovery from recent lows and is now trading above 1.2500.