The British pound fell to a five low as the Bank of England governor confirmed what markets already knew: the U.K. has entered a recession. The pound would drop to as low as 1.62000 before finding support ending a 1400 bps freefall which started at the beginning of the week. BoE minutes revealed that the central bank voted unanimously for the 50 bps rate cut that was part of the coordinated effort with the Fed and ECB. Since the unanimous vote was expected, the pound would find support following the release of the minutes and was headed to test the session highs of 1.6431 which were achieved after the initial bounce from support.

The statements following the release demonstrated that the MPC has abandoned inflation concerns and have turned their focus to growth. The central bank would state that “market conditions worsened markedly” and that consumer spending and investment has slowed considerable. It was obvious price pressures were no longer a concern when the committee stated that “CPI risks shifted decisively to the downside” and that a “labor slack made wage pressures less likely”. The current sell off of the Sterling may be overdone by forex traders but the next significant support level is the 1.5800 price level which could be tested with the expectations that GDP contracted 0.2% in the third quarter and a dour retail sales report expected.

The Euro has also started to find support after its 700 bps freefall that would see it drop to 1.2737- its lowest level in two years. The global recession is here and the fact that the ECB actually raised interest rates as the credit crisis was unfolding has put them behind the curb in stemming slowing growth. Now that the credit markets have started to thaw, traders have turned their focus toward fundamentals and the weakness in the Euro-Zone appears to be just beginning. A fall to parity is not out of the question, if the U.S. starts to show signs of emerging from the current downturn. Meanwhile, the ECB in a further effort to lubricate credit markets has offered banks unlimited funds for a week in two tenders where all offers by 13:45 GMT will be filed.

The looming global recession concerns have reignited risk aversion sending the USD/JPY to as low as 98.87. Indeed, stocks have come under pressure again as the Nikkei fell almost 7% and European indices were all trading lower. The expectation of slowing global demand has pushed the USD/CAD to its highest levels in four years, reaching as high as 1.2338 and heading higher as a dour retail sales report is expected today.

The dollar continues to be the beneficiary of risk aversion and the flight to safety and with the U.S. stock markets looking at a lower open and a relative empty economic calendar, we could see dollar strength continue. MBS mortgage applications are on tap and the second tier indicator may have a greater the expected impact given the current credit crisis. An increase in lending to borrowers may be further evidence that the efforts from the U.S. and global leaders are having their intended impact. The dollar may be in a no lose situation, although a return of risk appetite may lead to initial weakness, the greenback could resume its strength as the U.S. is expected to be the best positioned to emerge from the current downturn. Although, given the sharp moves against the Pound and Euro, we could see a retrace today as the moves may have been overdone and traders may look to take profit.

Antonio Sousa is a Currency Analyst for FXCM.