What a day yesterday that was, with EUR/USD collapsing from 1.4820 all the way down to 1.4590 in only a matter of few minutes!

The move was violent and stops got hit with traders exiting their long euro positions in fear of further fall in the pair.

What caused this crazy move? Well initially what sparked the sell off in the pair were comments from ECB Mersch regarding the state of the European economy. In his interview he implied that the bank has to rethink its monetary policy and maybe start easing rates due to the disappointing economic data and also the fact that the recent financial crisis in the markets has put enough pressure. Also he stated that ECB will revise to the downside the economic growth and that made investors panic with the sell off in the pair being abrupt and fast.

EUR/USD is trading now just above 1.46 and a clear break of 1.4580 will put 1.4525 as the next possible target. However yesterdays move was so big that a consolidation up towards 1.47 cannot be ruled out.

Yesterday’s inflation data from US showed that CPI didn’t fall as much as expected and the core number was unchanged. That of course gave more fuel to dollar strength as many traders were disappointed, as they already were pricing in a 50 or even 75 pbs cut next week. The TICS data also came higher and generally the dollar sentiment was more positive which helped dollar bulls no end.

Today is an interesting day as we have more housing data out of the US with housing starts and building permits being the first releases out. The forecasts are negative once again and that can weigh in the greenback, however a slightly better number will definitely help easing the fears of the sub prime crisis.

The most important event though is Bernankes testimony later today, which traders will monitor closely for clues as to what the FED will do in a few days. Many analysts forecast a cut but it will be important now for us to evaluate by how much will the bank cut?

GBP/USD made an impressive move today, printing 1.9715 daily high at the moment of writing, however only a clear break of 1.9740 can give us scope for further gains towards 1.98-25. The later level seems a good level to short with stops above 1.9860.

EUR/USD is trading heavily after the London opening and today’s trend so far seems to be on the downside, with 1.45 getting closer. However, beware that euro bulls will seize this moment and maybe try to re enter their longs with 1.50 still a target in the next few weeks.

Let’s see how the markets will react with today’s events and also what Bernanke will have to say about the American economy and if his comments imply that recession is possible…