Warning Of UK Recession Pulls British Pound To 5-Year Low Against US Dollar

The forex markets are feeling another round of aftershocks caused by the ongoing economic and financial crisis. The British pound and the Euro plunged yesterday (Tuesday) and today against the US dollar after renewed fears of a global recession caused traders to unwind more of their positions in the carry trade which is now dead. Of course, massive hedge fund redemptions are also playing a big role in The Great Unwind. Recession fever has spread from the US to Europe - the threat of a looming recession is now very real to UK, and that scenario was warned by Bank of England’s governor Mervyn King for the first time ever. King said:

Taken together, the combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand. Indeed, it now seems likely that the UK economy is entering a recession.

GBP/USD plunged - get this - 1000 pips between yesterday and today, from 1.7200 to 1.6200, a 5-year low in forex trading. EUR/USD fell at least 600 pips yesterday and today, from 1.3350 to 1.2745, a near 2-year low. It’s amazing how fast these high-yielding currencies can fall these days. The prospect of a sharp recession in the UK is casting a dark shadow on the battered pound, which only just last week struggled to claw back up. Meanwhile, it was revealed today that the BOE’s MPC unanimously voted for the emergency 0.5% interest rate cut two weeks ago.

Economic Calendar For Thursday:

UK retail sales 0830 GMT

US initial jobless claims 1230 GMT

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