Pound-Franc Rate Pierces above 1.3120 'Flag' Highs, Kicking Off New Up-Move

Image © Albert Czyzewski, Adobe Images

- GBP/CHF breaks higher after formation of bull flag

- Move above 1.3121 confirms extension higher

- Pound strengthens as Labour shifts stance to ‘people’s vote’

GBP/CHF is trading at 1.3204 on Tuesday, February 26, after rising over a percentage point already this week, and following a 0.85% gain in the week before.

Gains were mainly due to a strengthening Pound as the probability of a hard-Brexit continued to decline. Reports the government will lay out a series of parliamentary votes that would allow parliament to vote against a 'no deal' Brexit and have a seperate vote on delaying Brexit, have added further fuel to what has proven to be one of 2019's most popular FX trade.

Longer-term, the pair is predisposed to trade higher as Brexit risks continue to unwind with the chances of a deal of some sort being agreed are much greater than a 'no deal' scenario.

The positive overall fundamental outlook compliments an on-balance bullish technical picture with the pair now having formed a 'bull flag' continuation pattern. The steep rally in January constitutes the ‘pole’ whilst the sideways consolidation is the ‘flag square’. Bull flags are extremely bullish patterns.

The recent break above the 1.3121 flag highs confirms an extension up to a potential target at 1.3700 eventually, using the length of the pole as a guide and extrapolating it higher, which is the usual method for establishing an upside target.

There is a line of tough resistance coming up just above the market level, however, which poses a risk to the otherwise bullish outlook. This is posed by the 200-day moving average situated at 1.3324 and the major trendline just underneath at roughly 1.3300. Bulls will find it more difficult to bid the exchange rate up above these levels.

For clear confirmation of a continuation higher, we would look for the exchange rate to break cleanly above these two levels, confirmed by a break above 1.3390. Such a move would then open the way up to the target for the flag at 1.3700.

Momentum, as measured by RSI, is relatively strong and suggestive of a further upside too.

GBP/CHF is likely to be unusually sensitive to changes in Brexit sentiment compared to other GBP pairs. The Swiss Franc is a safe-haven currency, which means it rises when markets are in turmoil and weakens when concerns ease. The past broad backdrop of Brexit uncertainty has helped the Franc against the Pound but if there is a breakthrough in Brexit negotiations the reverse should lead to a volatile surge as the Pound strengthens at the same time as the Franc weakens.

It is not just Brexit which favours an appreciation.

The global uncertainty caused by the China-U.S. trade war is another factor which has supported the Franc with safety flows. This will probably be resolved in the coming week, however, as the deadline nears for the U.S. to implement tariffs of 25% on Chinese imports. The likelihood they will go ahead, however, is quite small as it would trigger a worsening in trade relations which both sides probably don’t want. A last minute deal of some sort to avert the rise in tariffs is more likely and this will lead to a rebound in investor risk appetite and hurt the Franc, leading to more upside for GBP/CHF.

From a 'hard' data perspective, the main release for the Swiss Franc is GDP growth data for Q4 on Thursday at 6.45 GMT. This is forecast to show a rise of 0.4% in Q4 after growth declined -0.2% in Q3. The growth rate year-on-year is expected to have slowed to 1.7% from 2.4% previously.

The KOF leading indicator for February is forecast to rise to 95.4 from 95.0 in February when it is released on the same day at the later time of 8.00.

Retail sales is forecast to rise by 0.3% in January compared to a year ago (from -0.3% prev) when released on Friday at 7.30 and Manufacturing PMI to slow to 53.6 from 54.3 in February when it is released on the same day at 8.30.

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