Sometimes, the most obvious opportunity is staring you in the face, stubbornly demanding attention as you look past it. When it comes to FX trading, one of the biggest advantages that traders enjoy is the ability to pair strong currencies with weak currencies, rather than just focusing on the “major” currency pairs. By matching strength with weakness, traders can, in theory, give themselves two ways to be “right” on a trade. The GBPCHF’s price action this week provides a perfect case study of this phenomenon.
On Tuesday, we highlighted the potential for more Swiss Franc weakness against both the euro and the US dollar. Meanwhile, we’ve been emphasizing the relative strength of the British pound consistently over the past few weeks (see here, here, here, here, and especially here for more), but we didn’t draw attention to the obvious conclusion: that GBPCHF was in the perfect position to rally.
And rally it has. Since bottoming near 1.27 in the wake of the SNB’s shocking decision to drop the cap on the franc just more than a month ago, GBPCHF has rallied by nearly 2,000 pips, all the way up to 1.4600 as of writing. In other words, the pair has now retraced about two-thirds of the biggest one-day G10 FX moves in over a decade in just the last month…and no one is talking about it! Perhaps more to the point, the current technical and fundamental pictures suggests that GBPCHF is well positioned to build on its gains and make a run for the 1.50 level in the coming days.
6 Reasons GBPCHF Could Extend its Gains Toward 1.50 Next:
1) Bullish Channel – the pair remains in the middle of a 3-week bullish channel, which could continue to guide rates up to the 1.50 as we move into next week.
2) Break above the 50-day MA – GBPCHF has also broken cleanly back above its key 50-day moving average. The lack of hesitation at this important potential resistance level suggests the bullish trend is still seeing plenty of buying pressure.
3) MACD cross above “0” level – the widely-followed MACD indicator has also crossed back above its “0” level, confirming a shift back to bullish momentum and opening the door for further gains.
4) RSI in bullish trend, but not overbought – at the same time, the daily RSI indicator is in its own bullish trend, but still has room to rally further before reaching overbought territory.
5) Relative economic performance favors the UK – while Switzerland is struggling with stagnating growth (1.9% y/y) and outright deflation (CPI = -0.5% y/y), the UK’s economy is (slightly) better off, with GDP chugging along at 2.7% y/y and inflation coming in at 0.3% y/y.
6) Positive GBP-CHF interest rate spread – As a direct consequence of the brighter economic outlook, UK yields offer a premium over their Swiss brethren. The benchmark 10-year government bond yield spread is 176bps, while the more monetary-policy-sensitive 2-year spread is 129bps in favor of the UK.
Given these bullish technical and fundamental drivers, GBPCHF bulls may look to drive the pair higher still in the coming days. The next major level of resistance is the 78.6% Fibonacci retracement of the post-SNB drop at 1.4932, but if we reach that barrier, the siren song of the psychologically-significant 1.5000 level may prove irresistible for bulls.