It may have taken just over 11 months, but this morning saw the GBP/CHF momentarily move above the level it was trading at on that day in January of this year when the Swiss National Bank (SNB) unexpectedly removed the 1.20 floor in EUR/CHF, causing the Swiss franc to surge higher across the board. The USD/CHF is also trading near its own corresponding level, while the EUR/CHF remains miles below 1.20, but it too has rallied about 100 pips over the past couple of days. So, you get the picture: the franc is weakening. This is because of lower and falling yields in Switzerland, where the benchmark nominal interest rate is -0.75 per cent. The real interest rate is even more in the negative territory due to Switzerland being stuck in deflation, with the Consumer Price Index measure of inflation decreasing by 1.4% year-over-year in October. The SNB is already extremely dovish and it has repeatedly warned that it may do more if the currency does not devalue aggressively and/or the economy falls further into deflation. Thankfully for the SNB, the Fed is now turning hawkish and with interest rates there likely to start climbing higher, if only moderately, the USD/CHF could embark on a significant rally.
Likewise, the GBP/CHF could further extend its gains as the Bank of England gets closer to an eventual rate hike. The recent increases in wages and employment levels in the UK suggest inflation could return in the UK sooner than expected, particularly if oil prices start gushing higher now. So, there is a risk the BoE will turn hawkish sooner than the market expects. With the USD already appreciating significantly in recent times, traders may prefer to play the potential weakness of the CHF against the GBP rather than USD. But the GBP has been undermined slightly by this morning’s news that retail sales in the UK fell by a larger-than-expected 0.6% in October, while September’s figure was revised a touch lower to show (a still-healthy) 1.7% increase. Nevertheless, the pound was managing to hold its own relatively well against both the USD and CHF this morning, but weakened slightly against the euro and the commodity currencies.
Now with the GBP/CHF rising in 8 out of 9 or 21 out of the past 27 days, the momentum indictor RSI is understandably at overbought levels of above 70, though this is not necessarily a bad thing. The RSI has got to these extreme levels for a good reason, which is that traders have been buying the underlying GBP/CHF. Whether or not it will now start to move lower from these overbought levels remains to be seen and depends on what price will do at or around the January high of 1.5545, for this level also roughly corresponds with the 161.8% Fibonacci extension (1.5535) of the most recent corrective move. So the area around 1.5545 should be watched very closely and if price shows signs of weakness here then we may see a sizeable pullback in the short-term. If the GBP/CHF does fall then supports such as 1.5500, 1.5400 and 1.5350 should be watched closely as price could easily bounce back and resume its long-term bullish trend.
Conversely, if the sellers show little enthusiasm to push the GBP/CHF lower then this should be interpreted as extremely bullish. As such, the GBP/CHF could easily accelerate to the upside and break to fresh multi-year highs. This is our base case. In the short-term, bullish speculators should watch the Fibonacci extension levels shown on the chart, where we may see some profit taking. These include 1.5645 and 1.5950, the 127.2 and 161.8 per cent retracements of the AB swing.