Dollar holds on to Wednesday's gains as oil prices slump to 1½ month lows and the ISM manufacturing survey rebounded by more than expected above the 50 level, tempering worries of an impending recession the manufacturing sector. The minutes of the December 12th FOMC did not shed any fresh light on the Fed's usual mantra of worrying about inflation and assessing a moderation in the level of growth. But the minutes were positive for the dollar and negative for stocks as traders had expected a more dovish take, especially after the Dec12 statement characterized the cooling in housing as "substantial". The fact that the Fed maintained its preoccupation with rising core inflation despite the recent softening in core CPI and PCE figures was enough to spook equities and further boost the dollar. FX markets will now focus on the Eurozone services PMI survey (4:00 am), Eurozone CPI (5.00 am) and UK services PMI (4:30 am), before shifting to the US reports on jobless claims (8:30 am), factory orders (10:00 am) and pending home sales (10:00 am).

Unless the services US ISM shows a bigger than expected slowdown, we expect further dollar gains in the European and US sessions, with the upside particularly seen against the Aussie (target at 0.7860) and sterling (target at 1.9450). The Eurozone services PMI is expected to remain unchanged at 57.6 in December, while its UK counterpart seen slipping to 59.5 in December from 59.8 in November. We consider the services ISM and pending home sales--both due at 10:00 am -- to be the key movers for the US dollar this morning. The ISM is expected to have cooled to 57.1 from 58.9, while pending home sales are expected to have rebounded by as much as 0.7% in November, following a 1.7% decrease in October. We expect the dollar to hold on to its gains in the event that these two reports come in within expectations. The rebound in pending home sales into positive territory will be crucial in bolstering the stabilization story in the US housing market.

Euro risks to the downside

Today's flurry of Eurozone and US data will likely distract the pair from finding a clear direction, but the technical picture appears increasingly euro negative in the short-term. The advanced December CPI data from the Eurozone is due at 5:00 am and is expected to have edged up to 1.9% from 1.8%. Any figure below 1.9% is likely to weigh on the pair, especially of the services PMI comes in below 57.5. Considering the pullback in gold prices, and our forecast for $620 per ounce target from the current $627, we expect EURUSD to be vulnerable to renewed selling towards the 1.3135-40, support, followed by 1.3100. Major support stands at 1.3070. Chances of a recovery face obstacles at 1.3220, followed by 1.3250.

Cable seen targeting 1.9455-60

We expect GBPUSD to extend its Wednesday pullback to further declines, as the array of data from the UK , Eurozone and US carries sufficient potential to maintain the current bearishness. With Tuesday's release of the UK manufacturing PMI falling to a 9-month low and today's services PMI seen slipping to 59.5, the path is open for dragging sterling towards the 1.9480 and 1.9455. Key support stands at 1.9405.

Hesitant USDJPY eyes 120

The 4 doji candles on the last 4-hour reflect indecision in the USDJPY, with the 120 figure acting as a psychological barrier and the downside underpinned by mixed economic reports from Japan . Continued concerns on sketchy consumer demand echoed by the MoF and the BoJ have also helped provide a floor at 118.50. Today's round of US figures on housing and services ISM carries the potential of elevating the pair towards the 119.80 figure. Follow-up target stands at 120.20.

Aussie extends sell-off

We noted yesterday that the Aussie's gains versus the USD were be largely on the back of euro strength as opposed to improved fundamentals in Australia, suggesting the pair will start its much awaited decline. Now that the pair has tumbled below the 0.79 figure, we see downside open towards 0.7870, followed by 0.7840. Upside capped at 0.7920.