Asia Pacific markets were lower across the board with the Nekkei 225 falling more than 2.5% after a sharp sell-off in US equities yesterday. News that credit rating agency Standard and Poor's had downgraded Greek debt to junk status, sent shock waves through global markets. Portugal's rating was also lowered, sparking concerns about sovereign debt contagion across the region. The Dow fell nearly 2%, closing beneath the 11,000 level, while the Nasdaq and S&P were both lower by 2.04% and 2.34% respectively. Adding to market pressures are uncertainty regarding the implications of the proposed financial regulatory overhaul which was manifested in yesterdays long and heated subcommittee hearing on capitol hill. Goldman Sachs came under scrutiny as senators questioned executives regarding the sales of synthetic CDOs on which they were allegedly short. The hearing made apparent the present disconnect between Washington and Wall St. At times it was evident that there seems to be a general lack of knowledge of the way market makers approach market-to-market transactions.

Risk aversion boosted demand for the dollar, driving bond yields lower with the 10-year yielding less than 3.7%. The Vix index, which measures implied volatility, surged more than 30% on the largest one day gain in nearly 2 years. Commodities came under pressure with crude oil falling below $82 per-barrel. A flight to safer assets however, drove gold prices higher, testing $1170 yesterday in New York before settling around $1164 early in London trade.

Euro in Free Fall

The uncanny timing of Greece and Portugal's credit rating downgrades, rekindled concerns regarding the risk of contagion across the Eurozone. The move triggered surges in bond yields in countries such as Ireland, Spain and Portugal as the contagion argument gains momentum. With Greek 2-year bonds bettering 18%, the enactment of the IMF backed EU rescue package cannot come soon enough for the debt-laden country. Germany has expressed support for the Greeks as well as the EU, but maintains that it will require a detailed 3-year austerity plan before any funds are to be released. The euro remains under considerable pressure with targets eyed at 1.3130, followed by 1.31, and 1.3020. Past the 1.30 figure, stronger demand rests at the long-term 100% Fibonacci extension taken from the Dec 18th 08' and Nov 26th 09' crests, at 1.2880. Interim resistance is seen at the 1.32 handle with subsequent ceilings seen at 1.3280 and 1.33. Upside potential gains momentum with breach of 1.3380.

Aussie Strength

Stronger than expected CPI data from Australia sparked concerns of rising inflation- leaving investors betting on the likelihood of a rate hike at the May 4th RBA meeting. The aussie climbed on the news, but soon succumb to dollar strength, relinquishing all of its gains early in London trade. Downside risk is likely to be limited with support seen at .9160 followed by .9130 and the .91 handle. To the upside, supply is eyed at the .92 figure, followed by .9260 and .93. A breach of the .9350 resistance could lead to substantial gains for the aussie.

At 2:15, the FOMC rate decision is widely expected to be unchanged, especially in light of the recent sovereign debt rating downgrades. Traders will be looking for clues to possible shifts in policy in the Fed's statement as market conditions in the US continue to show signs of improvement. Better than expected earnings reports from the likes of DuPont, Ford, and Dow Chemical, continue to pour in, suggesting the US recovery is on track and strengthening. Tomorrow Germany releases unemployment figures with the rate seen holding steady at 8%. Later in the day, consumer confidence data from the Eurozone is expected to show modest improvements. European markets were lower across the board for the second day with US equity futures pointing to a slightly higher open, mid-day in London trade.