The USD and JPY fell sharply after the U.S. reached a deal on the fiscal cliff. However, movement came on relatively low volume in Asia due to holidays in Japan and China, which restrained European market activity to a degree as participants digested the implications for the U.S. outlook. The U.S. deal focused on taxes, but negotiations will continue on spending cuts. Both the USD and JPY firmed up over the European morning, which left EUR just under 1.3250 versus 1.3300 highs, while USD-JPY is tied to the 87.00 area after topping out just over 87.30. Cable backed away from 1.6380 in Asia and moved just under 1.6300 as profit taking picked up despite a much better than expected U.K. manufacturing PMI release. Elsewhere, manufacturing PMI releases in Asia were encouraging, while the eurozone PMI was unexpectedly revised lower. North American markets will focus on U.S. fiscal developments, along with the U.S. ISM manufacturing data.

[EUR, USD]
EUR-USD experienced consolidation since late Asia after a strong rally out of the 1.3200 region following the U.S. fiscal cliff deal. The unexpected downward revision in eurozone manufacturing PMI had no impact on the EUR, which is still holding firm above 1.3250 amid sharp gains across global equity markets. The move on 1.3300 in Asia ran into decent offers, which come in ahead of December-19 highs just shy of 1.3310. Offers are seen from 1.3330 to 1.3350, where outstanding barriers come in ahead of early April highs around 1.3380. In the near-term, buyers will layer orders from 1.3250 to 1.3235 and across the 1.3200 region.

[USD, JPY]
USD-JPY drifted back to the 87.00 area, where modest size option expiries are due to roll off. The move off 87.30 highs is a function of JPY-cross profit taking following strong overnight gains in the wake of the U.S. fiscal cliff deal. EUR-JPY is trading around 115.25 after it topped out a pip shy of 116.00, while GBP-JPY also edged off 142.50 to trade under 142.00. Yen selling pressure on upticks is still likely in the near-term, but it has moved a long way of late due to Japanese policy risk and it may be due a small correction. Intra-day players are likely to buy into 86.80 and ahead of 86.50-60, while the upside is limited ahead of 87.50 barriers.

[GBP, USD]
GBP held steady after U.K. manufacturing PMI moved into expansionary territory to reach 15-month highs. The number was much stronger than expected, leaving Cable supported from 1.6320, where it started the European session. Overbought conditions on the hourly chart fueled a pullback from 1.6380 in Asia, which is also where option related offers were noted ahead of 1.6400 barriers. EUR-GBP pulled back from 0.8135-40 through 0.8120 into the U.K. PMI release, but the downside is limited by good support from 0.8110 and general EUR firmness. The risk backdrop should continue to drive action, though activity has been relatively low since the European open.

[USD, CHF]
USD-CHF found support under 0.9100 and posted a mild recovery to 0.9135 as profit taking went through. The pick up in risk appetite overnight reinforced the bearish technical backdrop, but once again movement under 0.9100 was disappointing due to a series of standing orders at 0.9080 to longer-term chart support at 0.9050-60 from early May 2011. The move lower should encourage selling pressure on upticks, but the lack of momentum under 0.9100 is pointing to more sideways action. Meanwhile, EUR-CHF is still marking time close to 1.2100, which is little changed from recent sessions.

[USD, CAD]
USD-CAD fell sharply from 0.9945 to 0.9860 in thin Asian trade and extended to 0.9850 in Europe. The pick up in CAD$ mirrored movement across the other commodity bloc currencies, which were boosted by U.S. fiscal cliff news. The U.S. deal should keep the U.S. economy on track and avoid a recession. USD-CAD is likely to experience a short period of sideways action as market participants digest near-term developments. The move lower has negated the recent uptrend, though it did come on very low volume and choppy two-way flows could go through before there is a sustained move.