USD/CHF steadily moves back to 0.9225 area, reverses a major part of overnight losses

• The risk-on impulse undermined the safe-haven CHF and assisted USD/CHF to regain traction.
• Subdued USD demand held back traders from placing aggressive bets and capped the upside.
• Thin liquidity conditions further warrant some caution before positioning for any further gains.

The USD/CHF pair maintained its bid tone through the early North American session and was last seen hovering near the top end of its daily trading range, around the 0.9220-15 region.

Following the overnight pullback from mid-0.9200s, the USD/CHF pair regained positive traction on Tuesday, though the uptick lacked strong follow-through. A turnaround in the global risk sentiment – as depicted by a solid recovery in the equity markets – undermined the safe-haven Swiss franc and provided a goodish lift to the major. That said, a combination of factors could hold back traders from placing aggressive bullish bets and cap any further gains.

Investors remain concerned about the potential economic fallout from the rapid spread of the Omicron variant of the coronavirus and the imposition of fresh restrictions. Adding to this, a fatal blow to US President Joe Biden's massive $1.75 trillion spending bill might keep a lid on any optimistic move in the markets. In fact, US Senator Joe Manchin, a conservative Democrat who is key to Biden’s hopes of passing the investment bill, said on Sunday that he would not support the package.

Meanwhile, modest US dollar weakness was seen as another factor that acted as a tailwind for the USD/CHF pair, at least for the time being. That said, the Fed's hawkish outlook, along with a fresh leg up in the US Treasury bond yields support prospects for the emergence of some USD dip-buying and additional gains for the USD/CHF pair. It is worth recalling that the so-called dot-plot indicated that the Fed officials expect to raise the fed funds rate at least three times next year.

In the absence of any relevant economic releases, the mixed fundamental backdrop warrants caution before placing aggressive directional bets. Investors might also be reluctant amid relatively thin liquidity conditions heading into the year-end holiday season. Even from a technical perspective, the USD/CHF pair has been oscillating in a range over the past two weeks or so. This further makes it prudent to wait for a sustained strength beyond mid-0.9200s before positioning for any further gains.

Technical levels to watch