USD/CHF remains on the defensive below 0.9200 mark, downside seems limited

The USD/CHF pair remained depressed through the early European session and was last seen trading just a few pips above the daily low, around the 0.9180-75 region.

The pair struggled to capitalize on the previous day's strong rally of nearly 100 pips from the 0.9100 neighbourhood and edged lower during the first half of the trading on Tuesday. Subdued US dollar price action was seen as a key factor that acted as a headwind for the USD/CHF pair and attracted some selling in the vicinity of the 0.9200 mark. The downside, however, remains cushioned amid the upbeat market mood, which tends to undermine the safe-haven Swiss franc.

Despite the continuous surge in COVID-19 cases globally, investors remain optimistic about signs the Omicron variant might be less severe than feared and is unlikely to derail the economic recovery. This has been evident in the recent strong runup in equity markets, which along with hawkish Fed expectations acted as a tailwind for US Treasury bond yields. This combination of factors should lend some support to the USD and limit losses for the USD/CHF pair.

Money markets have now fully priced in a first-rate hike from the Fed by May and two more by the end of 2022. This, in turn, pushed the yield on the benchmark 10-year US government bond to 1.6420% for the first time since November 24, on Monday. This should help revive the USD demand and add credence to the short-term positive outlook for the USD/CHF pair. That said, investors seem to be reluctant to place aggressive bets ahead of this week's key event/data risks.

The Fed is due to release the minutes of its December meeting on Wednesday. Apart from this, investors will take cues from important US macro data scheduled at the beginning of a new month. A rather busy week kicks off with the release of ISM Manufacturing PMI and JOLTS Job Openings data later during the early North American session on Tuesday. The Fed is also scheduled to release the minutes of its December monetary policy meeting on Wednesday.

This will be followed by the ADP report and the ISM Services PMI on Thursday. The key focus, however, will remain on the closely watched US monthly jobs report – popularly known as NFP on Friday. This will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the USD/CHF pair. Hence, it will be prudent to wait for a strong follow-through buying before confirming that the pair has bottomed out.

Technical levels to watch