Activity was limited ahead of the FOMC policy announcement, while pre-holiday trade is also starting to take hold as market participants wait on U.S. fiscal cliff developments. In Europe, sentiment was supportive as eurozone yield spreads started to come in a bit, while European stocks posted modest gains after a much stronger than expected German ZEW release, while Spanish refinancing costs also fell at today's bill auction. This underpinned the EUR on dips. The CHF weakened on SNB policy speculation after UBS announced that it would also charge fees on CHF deposits from December-21, which was widely tipped last week. In the U.S, fiscal cliff negotiations will continue to influence, while trade numbers, wholesale trade, and JOLTs are due, along with the 3-year auction. In Canada, the trade deficit is expected to widen to C$1.2 bln.

[EUR, USD]
EUR-USD moved above 1.2970 after much stronger than expected German ZEW confidence, while refinancing costs also fell in the Spanish bill auction. Further gains are being limited by large offers noted from 1.2970-80 and there are also good orders tipped from 1.3000. In Asia, demand was noted from an Asian sovereign from 1.2930 and more activity is likely to go through due to local currency intervention. The underlying tone for the EUR is still negative, which should encourage selling pressure on upticks, but a better risk backdrop could fuel a small squeeze higher. On the downside buyers are tipped at 1.2920-30, 1.2900 and 1.2880 is still a key level.

[USD, JPY]
USD-JPY drifted back towards 82.50, which reflected a pick up in the JPY crosses as specs keyed off firmer European stocks. EUR-JPY headed towards 107.00 after buying interest went through from 106.60 in early Europe, but may meet natural supply around the 107.00 region. USD-JPY should also meet exporter offers from 82.50-60, while option related activity remains a feature higher up, along with excessive yen short positioning. Yesterday's news that BoJ was likely to ease by another Y5 to Y10 tln next week is largely a given after a Japanese recession was confirmed on Monday. Interest is still on the low side ahead of the FOMC outcome and next Sunday's election, which LDP are broadly expected to win. Good bids are still tipped into 82.00-20, while a double bottom is noted at 81.70 ensuring that the downside is well supported. Note, there are still large outstanding option barriers from 82.90 to 83.50, which are rolling off on Friday.

[GBP, USD]
Cable firmed up on Middle Eastern demand, but lacked volume to take out offers into 1.6100. The market is lacking direction at current levels, but a combination of market positioning and slightly better sentiment today could squeeze out weak shorts through 1.6100. However, the overall tone is still bearish under 1.6135 and market participants are still bracing themself for more weak U.K. data this week, which should reinforce triple-dip recession risk. Cable may trade a bit higher, but fading rallies should continue amid weak domestic fundamentals and the drag from external factors, which include the unresolved fiscal cliff and eurozone uncertainty. Under 1.6000 there are good support levels from 1.5990 to 1.5950-60.

[USD, CHF]
CHF weakened after the European open amid SNB policy speculation. EUR-CHF took off from 1.2080 over 1.2100 after UBS confirmed it would introduce deposit fees on CHF balance from December-21, which was widely tipped last week. However, it triggered talk that SNB could introduce negative rates on Friday or raise the floor of the lower limit in EUR-CHF above 1.2000. EUR-CHF extended to 1.2115 on the speculation, though swissy shorts are a bit more contained after getting caught offside last week around 1.2150-70 and on the subsequent pullback below 1.2100. We expect the SNB to maintain policy status quo on Thursday. There are no signs that capital inflows have accelerated and the situation in eurozone is better than it was earlier in the year. Recent moves by UBS and CS on CHF deposits should also deter capital inflows to a degree without the SNB having to act for now.

[USD, CAD]
USD-CAD edged into the 0.9860 area in Asia, but ranges remain extremely narrow. Like other major dollar pairings, there was minimal interest on Monday and today, though the CAD has held on to last week's post-jobs report gains. The Canadian jobs surge supported retention of the BoC's tightening bias. In addition, the U.S. jobs report buoyed the CAD as well. Progress on USD-CAD's downside is slow due to support from 0.9865 to 0.9850, but Friday's break down should support selling pressure on upticks and offers are widely tipped from 0.9900-10 and 0.9940-50.