US SESSION: STERLING COLLAPSED AFTER CONFIRMATION UK IS RECESSION.

The dollar has seen considerable strength due to greater risk aversion. The EurUsd is trading close to yesterday’s close at the low range 1.25, while the UsdJpy dropped more than 230pips to the low 95 price area. The GbpUsd experienced a sharp decline as the pair slid 420 pips to the mid 1.49 level. The equity markets tumbled with the Dow down 3.5% or 300pts, in addition the European Stock indexes were negative with the DAX lower by 3.0% or 140pts. Bond yields tightened to historical levels with the 2yr treasury at 1.18% and the 10yr at 3.64%. Traders scaled back commodity exposure as oil dropped to $56bbl, and gold at $716oz.

Eurozone industrial production fell 1.6% vs. 1.8% exp, this trend is likely to continue with the worsening economic conditions. The Euro was slightly stronger against the dollar in early trading, but has since trailed off toggling back and forth around the previous close. The central story in the FX market was the collapse of the cable, following BoE Governor Mervyn King’s statement regarding the UK economy. He affirmed that the UK is in a recession and that GDP expectations need to be revised downward to reflect the severity of the financial crisis. Traders reacted aggressively to this news pushing the pair to prices reminiscent of mid 2001.

Reformations to the TARP plan should have also play a major role in global financial markets. Cleary the US govt. bailout will be extended to firms outside the scope of the banking sector, specifically the auto industry. Dollar strength persists as a safe haven currency providing a false support to current levels. Once we see a return to riskier assets, the dollar should lose some momentum.

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Advanced Currency Markets