Pound-Franc Forecast: Looking more Constructive
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- GBP/CHF showing bullish signs
- Trading in box pattern, likely to breakout higher
- Main driver of Swiss Franc is global risk appetite
The Pound-to-Franc exchange rate is trading at around 1.1991 at the time of writing after rising 0.1% so far this week and studies of the charts are showing that the pair may have reversed the downtrend and be about to move higher.
The 4-hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows how the pair has most recently started trading in a sideways range between around 1.1910 and 1.2090.
This is called a ‘box pattern’ by technical analysts and it often precedes a breakout higher or lower - in this case higher in line with the preceding up move.
The pair has probably reversed its downtrend in the short-term after completing more than two sets of higher highs (HH) and higher lows (HL) since the August 13 lows.
If the pair breaks above the 1.2095 highs it will confirm further upside to a probable target at the 1.2245 June 2017 lows.
The target is based on the height of the box pattern extrapolated higher, which is one method for forecasting breakouts.
The daily chart shows how the pair appears to have reversed its downtrend, risen, and broken above a trendline - all bullish signs.
Although the pair is currently consolidating within a box pattern as highlighted above, it will probably eventually breakout and go higher, continuing the new uptrend.
A break above the June 2017 lows at 1.2245 would provide confirmation of another leg higher to a target at 1.2370.
The RSI momentum indicator has risen strongly with the recovery, which has supported the bullish outlook.
The daily chart is used to give an indication of the outlook for the medium-term, defined as the next week to a month ahead.
The weekly chart - used to give us an indication of the outlook for the long-term, defined as the next few months - shows how the pair has paused in its downtrend.
GBP/CHF formed a bullish harami candlestick pattern three weeks ago, which can be a bullish reversal sign. The pattern’s significance was heightened by the fact that the following week was also bullish.
The pair is showing compelling signs that it may be reversing the downtrend on the 4hr and daily charts. On the weekly chart, there is evidence to suggest a reversal of the downtrend higher may be on the cards - the pair has formed a reversal candlestick pattern at the level of a major historical low - but overall the downtrend could still arguably be dominant.
Thus whilst a move higher to 1.2500 is possible in the long-term, there is also still a possibility the pair could recapitulate and break lower to a target at 1.1400, subject to break below the 1.1688 lows.
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The Swiss Franc: Risk Trends in Charge
The main drivers of the Franc over the short-term are likely to be global risk trends, the potential for active intervention by the Swiss National Bank (SNB), monetary policy in Europe, and domestic growth data.
The Franc is a safe-haven currency which investors tend to buy when they grow fearful. The U.S.- China trade war and its repercussions on global growth, therefore, have driven up the value of the Franc. If the trade war worsens, the Franc will rise even further, and vice versa if it improves.
Both superpowers recently threatened to raise tariffs on each other’s imports. These higher tariffs are scheduled to come into effect on September 1, which is next Monday.
"JPY and CHF long positions may benefit from increasing signs of monetary policy tools having less impact and the US-China trade escalation reaching a new level should the September 1 tariff increase go ahead. We stay generally risk-bearish despite bond yields falling toward record lows, citing the poor earnings outlook," says Hans Redeker, a currency strategist with Morgan Stanley.
A recent article in China’s People Daily confirms China’s is not yet ready to soften its stance, suggesting to Redeker that the chances of a Lighthizer-Liu call are reduced. China wants the US to return to the status reached at the Osaka G20 meeting, which may require the US to call off post-Osaka tariff increases.
There is a possibility that the two sides may change their mind at the last minute and decide to delay or scrap the higher tariffs, however, with only a few days to go, and no sign of improvement so far, this seems unlikely.
If the tariffs come into effect on Monday the Franc will probably rally on increased risk aversion and a bleaker outlook for global growth. A last-minute ‘reprieve’, on the other hand, would see a recovery in risk appetite and the Franc weaken.
The other two major geopolitical events which could impact on demand for the Franc are Brexit and political uncertainty in Italy.
The risks of the ‘no-deal’ Brexit in the UK have increased after the UK government decided to prorogue parliament, or shut it down, for most of the remaining period between now and the Brexit deadline. This makes it less likely parliament can derail a ‘no-deal’ Brexit. Oddly global financial markets and the Pound have reacted relatively sanguinely to the news, and U.S. equity markets, often seen as a barometer of risk appetite are actually rallying strongly in the futures market.
The situation in Italy, where there is no government after prime minister Conte resigned following a falling out with northern league’s Salvini, is more likely to improve than not, according to most commentators, who see a most likely outcome as a new government headed by a coalition between the M5S party and Democrat party. This could be announced shortly and is likely to boost risk sentiment, especially in Europe, and weaken the Franc in the process.
The other main driver of the Franc is direct intervention by the Swiss National Bank (SNB). The central bank may try to weaken the Franc which has become so strong it is damaging the competitiveness of Swiss exports.
There is evidence the strong Franc may already be biting after Emmi AG, a Swiss cheese-maker which exports Emmentaler cheese warned sales would be down by 19.5% in Q2 of 2019 as a result of the strengthening Franc.
If more companies suggest the Franc is impacting negatively on their sales the SNB may be driven to intervene directly to weaken the currency.
The problem with such a move, however, is that it would almost assuredly lead them to be branded a currency manipulator by the U.S. with extremely negative repercussions resulting.
The Franc could also be impacted by the monetary policy decision making of the European Central Bank (ECB), especially at their September meeting, when the ECB is widely expected to ease monetary policy which will weaken the Euro.
If this is the case, the SNB will almost certainly follow suit and further cut interest rates in Switzerland, which currently stand at -0.75%. Such a move will weaken the Franc since interest rates tend to be highly correlated with currencies as they impact on foreign capital inflows, making the destination more or less attractive to foreign investors.
The Franc may be impacted by GDP growth data scheduled for release next Thursday. Current forecasts are for GDP to rise by 0.4% in Q2 compared to Q1 and 1.0% compared to a year ago.
This would represent a slowdown from Q1’s figures which showed a 0.6% and 1.7% rise respectively.
A deeper-than-expected decline might weaken the Franc on release as it could increase the chance that the SNB would directly intervene in FX markets to support flagging export growth.
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