ECB cut rates by 25 basis points as Draghi rules out monetary financing

Tom Tong09/Dec/2011Currency Updates

GBP

Sterling rose to a one-month high against the euro on Thursday and looked set to rise to its strongest in nine months as investors sold the single currency on disappointment that the ECB had not made more aggressive moves to curb the debt crisis.

The pound showed little reaction after the Bank of England opted to keep interest rates at 0.5 percent. The decision was expected, which left the market’s focus on the euro and the European Central Bank.

The BoE also announced no change to its 275 billion pound asset purchase programme. However, many in the market expect the central bank to announce additional quantitative easing next year as concerns grow about the fragility of the UK economy.

The release of the minutes of the meeting in around two weeks’ time should provide a better gauge of when the BoE may resort to another round of money-printing.

EUR

Yesterday, we saw Draghi, President of the ECB, cut Eurozone interest rates to 1% as expected. We also saw news that the European Banking Authority confirmed after stress tests that European banks still had a shortfall of billion Euros. Crucially, they announced that German banks had a shortfall (which has to be made up by June 2012) of 13.1bn Euros. There is now a large threat that Commerzbank, Germany’s second-largest private sector bank, with a capital shortfall of 5.3bn Euros up from 2.9bn Euros 6 weeks earlier, faces nationalisation.

Today we see the second and crucial day of the EU Summit. The euro dropped to a one-week low against the dollar after a summit of European Union leaders failed to forge a unanimous accord, damping prospects for a rapid resolution to the region’s debt crisis. As expected, attempts to include all 27 EU states to agree to treaty changes have failed, with the UK leading the objections as David Cameron looks to retain powers in Westminster and protect the interests of the City of London.

The headlines have stepped up more pressure on the European Central Bank to expand its bond purchases and to have common euro zone bonds as these are the only ways to contain the debt crisis from falling into a negative spiral

The European Central Bank will be in charge of monitoring an emergency bailout fund.

USD

Disappointment over the ongoing European Union summit has dashed high expectations as risk aversion has grown. There has been appreciation of the American currency against the Euro and others such as the Australian, New Zealand and Canadian counterparts. Furthermore, during Australian trading this morning, gold has slumped as investors seek safety in the USD.

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Written by Tom Tong

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