GBP/CHF: Uptrend Likely to Resume after Earlier Setback

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- GBP/CHF gaps downwards following negative Brexit news.
- But pair is now recovering and uptrend is likely still intact.
- Brexit news to dominate GBP; risk trends to impact CHF.

The GBP/CHF rate gapped downward at the start of the new trading week following some negative Brexit headlines over the weekend, but the uptrend in the pair likely remains intact.

Some of the early damage has already been undone after positive comments from EU negotiator Michel Barnier, who reportedly said Monday that the talks are only hours away from 'the first text' of a potential withdrawal deal.

GBP/CHF's gap downward at the open was partly the result of the pair's sensitivity to 'crisis news' since the Swiss Franc is a safe-haven and so appreciates more than most currencies on the back of negative news.

Above: GBP/CHF rate shown at daily intervals.

GBP/CHF remains in a short-term uptrend as it has been ever since it broke out above the trendline drawn down from the April highs, at the start of October.

The pair's uptrend is more likely to resume than not and we expect it to continue higher to a target of 1.3300 so long as it can provide confirmation by a break above the 1.3173 high.

Such a move would also assume a hurdle above the formidable 200-day moving average (MA) situated at 1.3095. Whilst this is by no means a given and the pair could quite easily be rebuked by the MA again, there is still a good chance the exchange rate will successfully break above the average on its third attempt.

The Pound: What to Watch

The main driver of the Pound in the week ahead is likely to be Brexit news. If it looks like a withdrawal deal is on the table the Pound will rise, and vice-versa.

The headlines from the Sunday Times are worrying. If true then it might be the case that Theresa May will have to walk away from negotiations as she simply won't be able to muster parliamentary support for a wildly unpopular deal that risks the U.K. being subjugated to E.U. law indefinitely.

Yet, we always knew these negotiations would go down to the wire and with December being the final deadline we are not surprised by these negative headlines.

Markets could be accused of becoming far too optimistic on the state of Brexit negotiations of late. The EU always negotiates until the very end and we are seeing just this.

It is also possible that gains on any deal may be short-lived as even if the government announces a deal it will still have to get approval from Parliament, and this could be an arduous process, presenting a risk to Sterling.

The conservative government only has a small majority and is reliant on support from the DUP and every single one of it MPs, so there is a risk that if either the DUP or Brexit rebels vote against the deal Theresa May may find she does not have the majority to push it through, and this could weigh on the Pound.

On the hard data front, one of the most significant releases in the week ahead is likely to be inflation data for October, which, according to the market consensus, is forecast to show a 0.2% rise on a month-on-month (mom) basis and 2.5% rise on a year-on-year (yoy) basis (for headline inflation) when it is released on Wednesday at 9.30 GMT.

A result in line with expectations would probably be bullish for Sterling as higher inflation puts pressure on the central bank to raise interest rates which appreciates the currency.

This is because higher interest rates tend to attract more inflows of foreign capital drawn by the promise of higher returns.

There is a chance, however, that inflation will disappoint because of the waning influence of the cheap Pound which has appreciated on Brexit hopes. Headline CPI has already fallen from a peak of 3.0% in January due to the bounce in the Pound, so more losses are possible - although if comments from the Bank of England (BOE) are anything to go by unlikely.

"In its most recent meeting, the Bank of England (BoE) noted that it does not expect inflation to fall much further, with price growth instead holding fairly steady near the 2% target," say Wells Fargo in a note to clients.

Labour market data is also out on Tuesday at 9.30. The average earnings number is the most significant because of its influence on inflation.

The current expectation is for a rise of 3.0% in earnings including bonuses and for a rise of 3.1% in earnings excluding bonuses. Unemployment is forecast to remain at 4.0% and overall employment is forecast to have risen by 34k.

A result that is in line with expectations could be positive for the Pound as it will reflect an even stronger rise in real earnings since the fall in inflation from its January peak, which is positive for the interest rate outlook.

The final major release for the Pound is retail sales on Thursday, which are forecast to have risen 0.2% in October, rebounding from a rather weak -0.8% previously.

The annualised increase is seen at 2.8%, down from 3.0% previously, when the data is released at 9.30 London time.

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The Swiss Franc: What to Watch

The Swiss Franc is usually more driven by investor sentiment rather than domestic news and in the week ahead it will be subject to plenty of different sentiment drivers.

The main sources of risk aversion at the moment are Brexit and Italy. Although the former looks to have quitened down, news-flow around the latter is likely to increase Tuesday, the deadline for Italy to present the EU its revised budget.

Reports suggest the Italians are unlikely to have reduced their budget deficit and the likely result is that the EU Commision will reject the budget again. This could cause volatility in markets and increased flows into the safe-haven Franc.

The Franc could also rise if trade tensions between the US and China rise again. The US plans to increase tariffs on goods imported from China in January, with the rate set to rise from 10% to 25%.

Although Donald Trump has indicated he is now open to making a deal, it remains to be seen whether he and Xi Jingping can agree anything at the G20 summit at the end of the month.

Overall, risks are tilted in favour of an improvement in trade relations as economic reality sets in.

On the Swiss data front, the most important release in the week ahead is import prices data for October, which is forecast to show a 0.1% rise after a -0.2% fall in September.

Higher import prices tend to be negative for the currency as more Francs have to be sold to buy the same amount of goods, resulting in greater volumes of Franc-selling.

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