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- GBP/CHF poised for further gains on long Brexit delay
- Double bottom pattern signals more upside yet to come
- Pound to be driven by Brexit as Franc eyes SNB meeting
The GBP/CHF rate was trading around 1.3260 Tuesday after having fallen -0.3% so far this week, although the exchange rate could be steeling itself for a leg higher following the completion of a double-bottom pattern on the charts.
The pair weakened Monday after Prime Minister Theresa May's chances of getting her EU Withdrawal Agreement were dented by House of Commons Speaker John Bercow, who said the deal, or the circumstances in which it comes back before parliament, must be meaningfully different in order to qualify for another vote.
The has called into question whether Brexiteers will in fact have the change of heart toward PM May's deal that had been floated on Monday, because that change was motivated largely by a desire to avoid a lengthy Brexit delay but Speaker Bercow's intervention may have just made such a thing a certainty anyway.
As things stand now, the government is likely to request from the EU a lengthy extension to Article 50 window at the next European Council summit on Thursday which, if granted, will risk Brexit being derailed completely because Brussels could make another election or referendum a precondition for an Article 50 delay.
At the same time, there is still a risk that if one of the EU member states decides to veto the proposal, the UK could be left with no choice but to leave the EU without a deal on March 29, although this outcome is considered highly improbable by analysts.
Until the EU agrees to extend article 50 the Pound is likely to go sideways, but assuming the it agrees to a lengthy delay, Sterling will shoot higher over the coming days.
As a safe-haven currency, the Swiss Franc is influenced by Brexit too, because it has an impact on market risk appetite. This makes the GBP/CHF particularly sensitive to the twists and turns of the Brexit saga.
This double-sensitivity could ultimately magnify the gains seen by the GBP/CHF rate, leading to a steeper ripsaw higher over the coming weeks. From a technical standpoint, the charts are bullish too.
Above: Pound-to-Franc rate shown at weekly intervals.
The GBP/CHF pair has completed a double-bottom reversal pattern at the recent lows in the 1.20 area and subsequently broken above the neckline of the pattern, which is shown on the above chart.
It is now forecast to rise a similar distance as the height of the pattern extrapolated onward, which suggests a final target of 1.41. However, the 1.3750 level provides a more achievable initial target for the pair, in our view.
The two main obstacles to further upside are the 200-week and 50-month moving averages (MAs) that are visible on the above chart. However, a break above the 1.3423 and 1.3450 levels would confirm those obstacles are cleared and signal a continuation higher to the 1.3750 target.
Above: Pound-to-Franc rate shown at daily monthly intervals.
The Swiss Franc: What to Watch
The main event on the horizon for the Swiss Franc is the meeting of the Swiss National Bank (SNB) on Thursday, March 21 at 8.30 GMT.
Risks appear to be tilted to the SNB echoing the European Central Bank’s (ECB) more cautious tone at their March meeting, with negative implications for the Franc.
“The Swiss National Bank meets on Thursday and should echo the dovishness seen at the March European Central Bank meeting. Maintaining 3m CHF Libor at -0.75% well into 2020 looks very likely, as does continuation of FX intervention to limit Swiss franc gains. 1.1300/1310 to remain a strong support level for EUR/CHF,” says Chris Turner, Global head of strategy and head of EMEA and LATAM research at ING Bank.
The Swiss Franc could also be impacted by investor risk appetite and geopolitical events since it is a safe-haven currency which rises during periods of turmoil.
In relation to this, the conflict between Indian and Pakistan over disputed territory in Kashmir may be significant for the Franc. An escalation in conflict could impact negatively on risk appetite and lead to an appreciation in the Swissie on the back of rising safe-haven demand.
Currently, the enmity between the two nations appears to have eased. Another potential geopolitical influence may come from the progress of trade talks between China and the U.S.
A breakthrough is unlikely in the next week, however, based on comments made by Treasury secretary Mnuchin, who recently said, that although both sides had made a “lot of progress” it was more important to get “the right agreement and not rush it”. This suggests a breakthrough in talks may take longer than a week.
The Pound: What to Watch
The main fundamental driver for the Pound in the week ahead is probably developments in the Brexit process, with the Bank of England (BOE) meeting on Thursday also likely to cause volatility.
It is highly likely that the government will try, for the third time, to get its Brexit deal approved by Parliament, or failing that, that the EU will require a lengthy delay of article 50.
The latest reports from Brussels are suggesting the EU may try to make a delay conditional on either the UK having a second referendum, a general election or a very firm plan.
It is suggested this may focus minds, especially amongst Brexiteers who could fear a hijacking of Brexit if there is a delay. This will put pressure on them to accept the government’s negotiated deal.
The two most likely scenarios, therefore, are that Theresa May’s deal finally gets approved on a third attempt, or that Brexit is delayed on the condition of a referendum or general election being held.
Both would be very positive for the Pound, which compliments the overall bullish technical outlook.
The BOE meeting on Thursday, at 12.00 GMT, could also impact on Sterling. There is a risk the BOE may change its statement to reflect the recent slowdown in the economy. If so the Pound is likely to suffer.
Up until now, it had been assumed Brexit risks were the only thing stopping the BOE from raising interest rates, but the slowing economy may be providing them with other reasons not to.
“The economy has no doubt slowed but the Bank seems unwilling to shift to a more dovish stance, reasoning that it should just be patient for now as an ‘orderly’ Brexit outcome can dispel much of the uncertainty by itself and hence, kickstart investment and growth. Overall, the BoE is unlikely to deviate much from this stance, but if there is any change, it’ll probably be towards a more cautious bias,” says Raffi Boyadjian, an economist at XM.com.
From a purely hard data perspective, the main releases are employment data out on Tuesday, inflation data out on Wednesday and retail sales on Thursday.
Labour market data is expected to continue showing signs of strength, when released on Tuesday at 9.30. The unemployment claimant count is expected to have risen by only 2.7k in February - a relatively low count - the unemployment rate is forecast to be stuck at a historic low of 4.0% in January, and overall payroll count to have risen by 120k in December, according to consensus estimates.
More important for Sterling, perhaps, is average earnings in January, since this has more influence over Bank of England (BOE) policy.
If average earnings rise more than the 3.4% in January (3.2% including bonuses) that is forecast, inflation will probably rise and so will interest rates - with expectations increasing that the BOE will raise them, and this will drive Sterling higher. Higher interest rates are positive for the Pound because they attract and keep greater inflows of foreign capital.
Inflation is out on Wednesday and is another key metric for the Pound. As explained above inflation influences BOE policy which impacts on the currency. In January inflation came out surprisingly lower after falling -0.8% compared to December. If inflation is also shown to be negative in February it could really drive down the Pound. Current expectations, however, are for a 0.2% rise.
Thursday sees another major data release, in the form of retail sales in February, out at 9.30. This is forecast to show a -0.3% fall from 1.0% previously. A deeper-than-expected decline, however, could trigger more weakness for Sterling.
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