Pound-Franc Outlook: Established Downtrend Tipped to Extend, Beware Short-Term Bounce
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- GBP/CHF now in established short-term downtrend
- Momentum is oversold, but extension lower likely
- Swiss Franc to take cue from global risk trends
The Pound-to-Swiss Franc exchange rate is trading at 1.2881 at the time of writing after Sterling rose 0.36% on news that UK Prime Minister Theresa May is to announce fresh proposals to her Brexit deal with the view to passing it through parliament.
The gains will however to need to extend a great deal more to make up for the ground lost in the previous week.
Losses were driven by a combination of fading hopes of cross-party Brexit talks yielding a deal, increased chances of Theresa May resigning and being replaced by a Brexiteer, while the Franc benefited from safety flows after U.S. China trade talks collapsed.
The technical picture is now decidedly bearish after ten down-days in a row. Given the trend is generally accepted to be the trader’s ‘friend’ this downtrend is expected to continue and the bias lies to the downside.
The one slightly concerning indication that cautioning us against getting too bearish, is the location of the RSI momentum indicator in the bottom panel, which has entered oversold territory, by moving below 30.
According to Welles Wilder the inventor of the RSI, this is a sign for traders not to open more bearish bets. There is a risk now that the pair could pullback or go sideways due to the market’s oversold conditions. This is likely to be merely a temporary delay, however, before bears push prices lower again.
One obvious level any correction may rise to is the 200-day MA at 1.2893. This could act as a ceiling from where the exchange may start going down again.
A break above it, on the other hand, would bring into doubt the downtrend and start to indicate a possible reversal. As it is, however, we don't see this happening and the bias remains with an eventual continuation lower, to a possible target at 1.2700. This could be reached in a 1-3 week time horizon.
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The Swiss Franc to Take Cues from Investor Sentiment
From a fundamental perspective, the outlook for the Swiss Franc is overall bullish given how continued global headwinds are likely to weigh on investor sentiment, and potentially lead to an increase in safe-haven flows towards the Franc.
Global risk factors include the escalating trade war between the U.S. and China, rising oil prices from Iran sanctions, increased hard-Brexit risk and late cycle U.S. economic dynamics.
The Franc is likely to be one of the beneficiaries of any worsening in risk sentiment.
There is a risk of the trade war intensifying, and if so, this would be positive for the currency. A possibility here would be the U.S. expanding tariffs to include another circa $300bn of Chinese goods.
News the U.S. had targeted Chinese phone-maker Huawei as a potential national security risk and banned U.S. companies from using Huawei technologies was the latest evolution in the trade war. Fears of a spill-over into global equity markets could see the rise in haven flows for the Franc.
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