Markets turned defensive after U.S. fiscal cliff negotiations stalled and Greek finance minister Stournaras warned it faced a 'make or break' year, with 'possible risk' of an EMU exit. The USD rallied as specs booked profit on short positions. JPY was choppy after the BoJ met expectations and increased its asset purchase programme by Y10 tln. China's November leading indicator slowed to 1.1% from 1.6%, which indicated that the growth outlook is still fragile. There is little for markets to digest in Europe today, leaving the focus on headlines related to the U.S. fiscal cliff and the risk backdrop.

[EUR, USD]
EUR-USD pulled back sharply from N.Y. session highs of 1.3308. U.S. fiscal cliff headlines fueled profit taking and thin trading conditions forced it back to 1.3235 in the N.Y. afternoon. A warning from Greek finance minister Stournaras over EMU exit risk fueled follow through selling in early Asia to 1.3188 lows. However, dip buying was evident and Asian central banks also took advantage of the weaker levels, which helped it back to 1.3220 by early Europe. The trend is still on higher levels, but the pullback from 1.3300 is likely to result in more choppy action.

[USD, JPY]
USD-JPY experienced profit taking after the BoJ expanded its asset purchase programme by Y10 tln and the BoJ signaled it would review its current 1% inflation target at the next policy meeting in January. USD-JPY pulled back from 84.40 to 83.90, but steadied as market participants anticipate further policy measures after Abe forms a new cabinet on December-26. EUR-JPY fell back from 111.60 to 110.80, which compared with yesterday's 112.50 highs. The market reacted adversely to a warning from Greek finance minster Stournaras on a Greek EMU exit, as well as the U.S. fiscal cliff impasse. However, both USD-JPY and EUR-JPY met dip buyers and bias should still gravitate to higher levels.

[GBP, USD]
Cable pulled back from just over 1.6300 on Wednesday to trade back to 1.6240. Profit taking set in after 2012 highs at 1.6310 remained intact and risk appetite soured as U.S. fiscal cliff negotiations reached an impasse. In the near-term there is likely to be some short term demand on dips, but failure to take out 1.6310 will limit upward momentum. Sellers are noted from 1.6280, while more support is tipped at 1.6220 and 1.6200.

[USD, CHF]
USD-CHF rebounded from 0.9090 to trade just over 0.9150 as dollar shorts covered on risk aversion. The technical backdrop for this pair is still likely to fuel selling pressure on rallies. There are 0.9160-70 offers and more congested on the approach of 0.9200. However, the recent break lower points to a test of early May lows around 0.9050 and then the 0.9000 area from late April.

[USD, CAD]
USD-CAD was supported into the 0.9850 level in Wednesday's North American session and made its way to highs over 0.9890 by early Asia as risk aversion set in. The rebound from 0.9830-35 this week should see range players sell towards 0.9900 ahead of resistance from 0.9910 to 0.9935. Buyers are likely from 0.9850 to 0.9830, which are protecting good size sell stops through 0.9825.