The Bank of England raised interest rates by 0.50% yesterday, taking the Bank of England base rate to 2.25%, its highest level since 2008. Further hikes are expected in the coming months with analysts now forecasting a peak of 4.80% next year.

The vote was split, with some members arguing for an even bigger move yesterday.

The Bank will also start to unwind its Quantitative Easing (QE) program next month, despite acknowledging the economy may already be in a technical recession.

Recent economic data has highlighted the extent of the challenges facing the central bank as they balance high inflation and a tight job market, against slowing retail sales and an ongoing squeeze on household budgets.

Today the focus turns to the government fiscal policy as the chancellor lays out plans to support and grow the economy. However, there are concerns over the fiscal credibility of how this will be funded, with government debt levels already uncomfortably high.

In the US, the Fed raised interest rates by a further 0.75% as they continue their path of aggressive policy tightening, raising the expected peak in rates to 4.60% next year as they fight to bring down stubbornly high inflation.

The European Central Bank are also set to continue their cycle of forceful rate hikes despite the grim economic outlook and the huge concerns over gas supplies and risks of a further escalation of the war.

The UK jobs market remains robust, with wages rising 5.5% and unemployment down to 3.6%, its lowest level since 1974. However, with inflation sticking around 10%, the squeeze on disposable incomes continues to weigh on the economy. The government will deliver a mini-budget next Friday.

The Bank of England meet next Thursday, with the market favouring a 0.50% hike, though there is a real possibility of 0.75%. Further rate increases are expected in the months ahead, with the peak now expected to hit 4.40% mid-2023.

US inflation came in at a higher than expected 8.3%, leading to an aggressive sell-off in global equity and bond markets, and reinforcing the view that the Fed will hike by a further 0.75% next week, with rates forecast to peak around 4.45% next year.

The European Central Bank are also expected to continue their aggressive cycle of policy tightening following the unprecedented 0.75% increase earlier this month, as they focus primarily on inflation, despite the dire economic outlook and the huge concerns over gas supplies.

Market volatility remains at extreme levels on the huge uncertainty, with the global economy facing the unprecedented challenges of surging inflation, rising interest rates, war in Ukraine, lockdowns in China and the ongoing supply chain issues.

Sterling was soft at the start of a new week following the release of domestic GDP data that showed July's economic rebound was weaker than expected. UK GDP rose 0.2 percent in July, less than the 0.3 percent figure the market was expecting, nevertheless, this was still a sizeable bounce-back from June's -0.6 percent reading which was largely as a result of the extra bank holiday to mark the Queen's Platinum Jubilee. The ONS said the UK's economic rebound in July was largely driven by growth in the services sector, but the bigger picture was one of stagnant economic activity with growth being flat on a rolling three-month timeline.

Looking at the details of the UK GDP data shows, outside of services, activity was weak: industrial production (-0.3 percent) and construction output (-0.8 percent) disappointed, while manufacturing output (0.1 percent) recorded an expansion in July.

Across the channel, the Euro starts the new week better supported on the back of Ukraine’s successes on the battlefield. Ukrainian liberation forces made significant gains in a counter offensive against Russian forces in the northern Kharkiv region, suggesting a potential tipping point in the conflict.

Finally, the Dollar's trend of appreciation remains intact on a longer-term basis and any setbacks in the Greenback are therefore widely viewed as temporary.

The Euro fell to its lowest levels against the Dollar in 20 years, while the Pound fell to its lowest level since March 2020 as investors anticipated a negative hit to regional economic growth as a result of wholesale gas price rises. Gazprom, Russia’s largest natural gas producer, had pre-announced a three day maintenance shutdown to the Nordstream 1 pipeline for the end of August, but it announced Friday the shutdown would now be indefinite.

The Euro to Dollar exchange rate pierced 0.99 to test a low of 0.9878 before returning to 0.9913 at the time of writing. This takes euro payment exchange rates to around 0.9637 at major high street banks. Meanwhile, the Pound to Dollar exchange rate sunk to a low of 1.1442 before returning to 1.1475 at the time of writing.