GBP/CHF is Now in a New Downtrend after being Rejected By Trendline

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- GBP/CHF in short-term downtrend driven by risk-off market.

- Support zone in the 1.28-29 area likely to act as hard floor.

- GBP to take cues Brexit talks, CHF eyes market risk appetite.

The GBP/CHF was trading around 1.3025 late Tuesday after falling almost a percentage point thus far in the week, although signals coming from the charts suggest more losses may be just around the corner for the exchange rate.

The main reason for the decline is a rise of the Swiss Franc, which has gained from safe-haven flows after the U.S. China trade talks hit a brick wall, culminating each side increasing the tariffs levied on goods imported from the opposing country. 

The technical picture has turned from an increasingly bullish one, to outright bearish after the exchange rate reversed and broke below the major trendline running from the 2015 highs last week. The market also broke below the 200-week moving-average in the process, which is another bearish sign.

Above: GBP/CHF rate shown at 4-hour intervals.

The pair has now established an uninterrupted sequence of lower peaks and lower troughs, suggesting the short-term trend has changed. The bias is now for more downside, although meaningful declines are conditional upon a slide below the 1.3009 level.

Such a break would probably lead to a continuation down to a target of 1.2925, likely some time in the next 1-2 weeks. 1.2925 represents the top of a support area made up of major moving averages (MA) and is likely to act as a hard floor under the exchange rate, leading to at least a temporary bounce, but possibly even a recovery.

The relative-strength-index momentum indicator in the lower pane is currently in the oversold region, which suggests the exchange rate itself could be oversold. While a complete reversal is not expected, the pair could bounce, stall or go sideways for a time before heading down to 1.2925.

Above: GBP/CHF rate shown at daily intervals.

The support zone located at 1.2925 is likely to stymie further downside. The next levels down to watch are at 1.2825 and 1.2700, but an arrival at either of these could take between two and eight weeks to materialise. Such moves would also likely require a fresh downward impetus. 

Meanwhile, the bigger picture shows how the pair has been rejected by the major trendline drawn from the 2015 highs, as well as both the 200-week and 50-month moving averages. 

Above: GBP/CHF rate shown at weekly intervals.

Despite the recent failed attempt at a breakout higher, the larger time frame charts show that more broadly the pair is still testing the trendline and so a breakout to the upside is not out of the question, although this is likely to be more of a medium-term possibility over the next 3-6 months.

Above: GBP/CHF rate shown at monthly intervals.

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The Swiss Franc: What to Watch

The main factor impacting on the Franc this week will continue to be investor risk appetite, which has hit rock-bottom recently given the escalating trade war between China and U.S.

The Franc is a safe-haven currency which means it gains when investors grow fearful and need somewhere safe to park their capital. This explains why it was one of the few currencies rising as the White House went on the warpath last week and on Monday again.

Both superpowers are now in the process of implementing higher tariffs on goods imported into each other's countries. The sudden breakdown of earlier talks took the markets by surprise and the Franc rose strongly as a result.

There seems no straightforward solution to the trade war since the positions of the two camps are still too wide apart to be easily bridged, so the conflict is unlikely to be resolved quickly.

China wants an end to all tariffs on its products and softer legislation preventing intellectual property theft than that which it is said to have agreed to in the draft trade deal. The U.S. says it's quite happy with tariffs, which appear to be having the desired effect of reducing the U.S. trade deficit.

Although there are parts of the economy which stand to lose from higher Chinese tariffs on U.S. exports, such as soybean growers, who used to be exempted from tariffs but will not be, President Trump has promised to distribute some of the tariff revenue to those hit hardest by the trade war. This suggests a more dug in position than previously expected when the market appeared to have a rather panglossian view of the outcome of talks.

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The Pound: What to Watch this Week

The main economic release out for the Pound this week is March jobs data. The UK labour market has been resilient in the face of political and economic uncertainty of late and if that idea is reinforced again this week then the Pound might benefit. 

A strong labour market can mean rising wages, increased inflation and higher interest rates further down the line, which could then lead to a stronger Pound because currencies tend to rise and fall with interest rates.

February’s figures were especially good after they showed the unemployment rate remaining at only 3.9% and some 179k new jobs being created. March is expected to have seen the unemployment rate remain steady.

Average earnings growth is expected to be a slightly lower than in February, coming in at 3.4% annualised, down from 3.5% previously.

“The UK jobs market has been fairly resilient even though economic growth has slowed notably from the ongoing Brexit uncertainty,” says Raffi Boyadijian, economist at FX broker XM.com. “Wage growth in the UK is currently at a 10-year high, which is good news for consumers who have been the main drivers of the British economy amid weakening overseas demand and falling business investment from Brexit.”

Brexit continues to be a major risk factor for the Pound, which could see loses in the week ahead if tenuous cross-party talks breakdown.

A rise in support for Nigel Farage’s Brexit Party, which is leading in the polls with 34% of the electorate ahead of the May 23rd vote, may mean it's less likely Labour and the Conservatives will strike a deal as the pressure on the Conservatives to pursue a 'clean break' Brexit is growing.

In an interview with the Guardian over the weekend, the leading Labour negotiator Sir Keir Starmer said it was increasingly likely that Labour would only back a deal that provided for a second referendum on EU membership. Starmer said there was a huge segment of Labour parliamentarians that would only consider voting through a deal if a second vote was provided for, therefore he believes it would be futile to agree to any deal that does not provide for one.

The Conservatives would almost certainly vote against any deal that does contain a provision for a second vote.

We expect the death of talks will be announced within days.

The prospect of May departing and a general election occurring over coming months therefore remains high, creating the kind of uncertainty that would be expected to keep Sterling under pressure.

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