Heading into Fed Chairman Bernanke's speech on The Crisis & the Policy Response (13:00 GMT), we expect to hear a reiteration of the FOMC's message of prolonging the expansion of the central bank's balance as its principal strategy to maintain ultra low interest rates. It remains to be seen whether this message of persistent would ease the renewed sell-off in equities, but it may further ease the stress in credit markets. Bernanke's speech may also give clues as to whether his long-held support for inflation-targeting would begin to emerge considering that annual core CPI growth has fallen to 1.8%-- well below the Fed's preferred 2.0% territory— and ensuring the continuation of zero interest rate policy (ZIRP). One main disadvantage of inflation targeting for the Fed would be removal of policy flexibility since the central bank is currently not bound to any quantitative targets as is the case with the ECB and BoE. Nonetheless, it should not be ignored that the Fed did publicly adhere to its price stability objective this summer—for far too long—which was a major reason for being behind the curve in stemming the early stages of the housing crisis and the resulting credit crunch. For the time being, Bernanke will likely use the rapid decline in price growth as an ideal opportunity to formalize inflation targeting into a new doctrine and justify quantitative easing ahead.

US trade balance release (13.30 GMT) seen producing a marked decline in the Nov deficit to $51 bln from Octobers' $57.2 bln. But it's the budget balance release (22.00 GMT) that is likely to draw more attention with an expected jump in the deficit to $83 bln in Dec following the $48 bln in November, resulting from as much as a 10% decline in receipts compared to Dec 07.

VIX rose for the second straight day, reaching a 3-week high of 45.80 and showing the first back-to-back increase since November. The index, which is inversely related to equities and risk appetite, can be helpful in gauging the next move in risk appetite through its developments. The array of potentially negative US data (Wednesday's retail sales, Thursday's Philly Fed and Friday's Industrial production) may further fuel the VIX towards the 50 level, and likely to run into resistance at the 55 level. Consequently, this could mean another 5% slide in the S&P500 towards the next support territory of 815-818.

Euro broke well below the $1.3250 support after S&P placed Spain on creditwatch for a possible downgrade. The news added to the euro's sell-off ensued on rising risk aversion and speculation of a potential 75-bp cut this week. Escalating concerns over the Eurozone's integration have proven costly for the single currency, and the latest evidence of disparity among member countries debt situation fuels the latest downside. A breach of $1.32 is necessary for accelerating selling momentum into the next support of $1.3080.

USDJPY, EURJPY and GBJPY sold off on the notable reduction in risk appetite, but sharp losses ensue in EURJPY given the risks for a 75-bp ECB rate cut and S&P's warning against Spain's credit conditions (following Italy and Greece last week). EURJPY sheds 10 yen in 5 days to 118, eyeing the 116 target in the short-term.

NZDJPY proved another major loser after S&P's downgrade of NZ's foreign currency outlook to negative, which added to the gloom triggered by multi-decade lows in NZ's business confidence. NZDJPY lost nearly 3 yen to 49.32, which is 2 yen away from last month's 8 year lows. A breach below 47 is likely to call up the 45 yen low. One way to highlight Kiwi's erosion is through the beleaguered Aussie, which is pushed up AUDNZD from 1.18 to 1.209 in the past 10 hours. 1,2370 remains key barrier. USDJPY remains on course in testing the medium term target of 86 yen, but current momentum must breach below 88.40 interim support. the 4-hr chart. The level also presents the 38% retracement of the drop from the 94.58 high. Upside seen capped as high as 90.20.

Sterling's losses extended even against the distressed euro amid record-breaking trade gap in November (£8.3 bln from Oct's £7.6 bln) and headline-grabbing reports from the British Chamber of Commerce warning of frightening pace of deteriorating economic conditions. Cable extends its 3-day slide to a 7-cent losses reaching below $1.46, paving the way for an anticipated $1.4430. key foundation is eyed at $1.4350, a real test of which is likely to be the combination or global risk appetite and the ECB decision.