The sentiment improved in the market after the Bank of England and the European Central Bank rate decisions, where the BoE left rates at record low in order to spur growth, while the European Central Bank responded to mounting market pressures and speculations of a rate cut.
The Bank of England's Monetary Policy Committee voted on today to leave the official Bank Rate paid on commercial bank reserves unchanged at 0.5%. The Committee also voted to hold the quantity of asset purchases program, financed by the issuance of central bank reserves, steady at £275 billion.
The Bank as expected left rates unchanged at 0.5%, the lowest record ever, and the asset purchasing program at 275 billion pounds, as the Bank aims to spur growth and revive the faltering economy, especially when the escalating debt crisis hurt the U.K. economy sharply, while inflation remained high around 5%, in the time unemployment climbed to 8.3% in November, the highest in 3-years, from 8.2% recorded in October.
The Sterling pound gained strength against the U.S. dollar and recovered the losses incurred earlier today, where after the opening of $1.5708, the GBP/USD pair declined to a low of $1.5691, but then rebounded to the upside to reach the highest at $1.5734. The pair trades now around $1.5724.
The U.S. dollar index (USDIX) reversed to the downside after the euro and the sterling pounded recovered some of the losses seen earlier, where the U.S. dollar after the opening of 78.41, the index recorded the highest at 78.49 and the lowest at 78.28, and is currently trading around 78.34.
On the other hand, the European Central Bank Governing Council voted to cut key interest rates by 25 bp to 1.00% from 1.25%, where the Bank aims to quell market jitters, spur growth and revive the recovery, especially when the escalating debt crisis threatens now the monetary union itself.
European leaders will gather today at evening in Brussels in order to start the two-day make-it or break-it summit, where European leaders are under pressure to tackle the debt crisis and prevent the contagion from spreading further, where the U.S. rating agency S&P threatened the euro-area region with a possible downgrade in case they were unable to ease market tension by coming up with a appropriate and strong plan to curb the escalating debt crisis.
European leaders are expected to launch the European Stability Mechanism (ESM) in mid-2012, where this mechanism will run alongside with the EFSF, in attempts to double the firepower of the European rescue fund, nonetheless Germany already voiced rejection to the move that added to the jitters. In addition, the International Monetary Fund (IMF) will not be ruled out and it will support both facilities to function and will provide further help to struggling economies, which in turn could create what so-called bazooka that is projected to create a credible financial firewall that will shield Europe from the debt crisis contagion.
The euro gained strength against the U.S. dollar after the rate decision; however, eyes will be concentrated on Draghi's press conference for more details regarding the rate decision and other tools used by the European Central Bank to ease tensions and market jitters especially with expectations for longer-term liquidity operations of one to two years at least.
The EUR/USD pair rebounded to the upside from the lowest intraday record seen at $1.3376, to currently trade around $1.3420, after reaching a high of $1.3429, noting that the pair opened the session today at $1.3410.