A bit of a reality check yesterday after a round of three big hits the bears landed on the bulls.  The day kicked off badly with the weak German business sentiment, then a left-handed jab with worse than expected US housing data before the right hook from dire consumer confidence that almost knocked the bulls out completely.

European markets are set to open flat this morning and little direction has been provided by early German GDP numbers.  In line with expectations we see this release of German Q4 GDP show that Europe’s biggest economy has almost dipped back into recession growing at zero percent.  This does not bode well for the euro zone and in particular the UK as our continental friends are our biggest trading partners.  If they continue to struggle it will only serve to prolong our feeble growth prospects.

The clear shift in the risk trade was made even more apparent yesterday after the blow to consumer confidence in the US actually led to a stronger US dollar.  Bad news is continuing to hammer the euro and sterling, which in turn puts pressure on the likes of oil, gold and of course equities.  A continuation of such poor data and news flow could continue to serve to strengthen the US dollar as its traditional safe haven status comes back into play.  To think that only a few months ago there were calls for the euro to replace the US dollar as the world reserve currency!

The focus today will be on Ben Bernanke’s testimony to Congress which is due to commence at 15h00 so for those Dow intra-day traders (and FX traders for that matter) there could be some volatility in this afternoon’s session.

The markets have not added to yesterday’s losses despite a relatively weak Asian session.  The FTSE has found support around 5300 and bounced off there recouping a bit of ground.  This is despite weakness in mining stocks with banks leading the way.  HSBC is one of the top leaders and already one gets the impression that investors are stocking up ahead of next Monday’s results.

Currency markets once again were extremely volatile with the main beneficiary being the dollar.  The dollar index has gained some 4% so far in 2010 creating a bull trend that shows little sign of slowing at the moment.  The poor US consumer confidence data and German sentiment numbers knocked the wind out of the euro and once again we see the early stages of what look like a recovery for EUR/USD petering out.

This morning’s German GDP numbers have done little to affect the markets.  A test of the recent low in EUR/USD cannot be ruled out as there seem to be few willing buyers of the single currency at the moment, so 1.3455 is a level to watch and if this is broken up the bears will be focused on 1.3000.

With the risk trades in FX continuing to be out of favour, Cable also took a hit and we’re testing the 9 month lows set on Friday.  Mervyn King’s comments yesterday about the possible need to reintroduce QE really struck a blow for sterling.  Like EUR/USD Cable is hovering with bears looking to the next major support level of 1.5350, then 1.5300, but below there could open up 1.4400!

Gold is taking a breather after continuing to fail around 1125-3- and for now 1100 is just providing a little support.  Further dollar strength will put the pressure on precious metals as the bulls continue to gain the upper hand.

Oil is also struggling to maintain momentum with each run at $80 being slapped down.  Oil inventories are out this afternoon and traders will look to see if they compliment the decline in stocks reported by the API yesterday.