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Pound-to-Franc Rate Uptrend Still Intact, Poised for Further Gains

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- GBP/CHF uptrend intact, further gains ahead. 

- 1.3430 March high a key level, must be overcome.

- GBP to be driven by Brexit; CHF global risk appetite.

The Pound-to-Franc rate was trading around 1.3138 Tuesday after rising strongly during the morning session, although studies of the charts suggest the exchange rate could go further over the coming days. 

Sterling advanced Tuesday after Jacob Rees-Mogg, head of the influential European Research Group of MPs, said recent events mean it won't be long before the only choice available to Brexiteers is between PM May's contentious and twice rejected EU Withdrawal Agreement, and no Brexit at all. 

The European Research Group of MPs is set to meet on Tuesday evening, presumably to discuss a way forward, although it remains far from clear whether Rees-Mogg's change of position will be enough to tip the balance for the EU Withrawal Agreement.

Market focus has now turned toward April 12, which will see see government choose between a further extension of the Article 50 negotiating window and leaving the EU without a withdrawal agreement if the House of Commons has not backed the EU Withdrawal Agreement by then. 

As a safe-haven currency, the Swiss Franc is also influenced by Brexit through the impact it could have on investor risk appetite. This makes the GBP/CHF pair particularly sensitive to the twists and turns of the Brexit saga. 

From a technical perspective, charts suggest the exchange rate will trade with a bullish bias over the coming days. 

Above: Pound-to-Franc rate shown at daily intervals.

The pair has been in a short-term uptrend ever since the beginning of the year and so-far has shown no signs of abating. If this nascent trend takes the market above the 1.3430 high struck at the beginning of March, a continuation up to the 1.3850 could then unfold.

That marks the top of a long-term range that has spanned the distance between 1.22 and 1.38 since the middle of 2016.

However, and on the downside, a trend reversal cannot be completely discounted given the March correction that is clear on the above and below charts. Any break below the 1.2800 level would confirm a reversal of the trend.

Above: Pound-to-Franc rate shown at weekly intervals.

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The Swiss Franc: What to Watch

The Franc performed strongly last week after disappointing economic data from a number of major countries stoked concerns about the outlook for global growth and led to increased safe-haven flows toward the Swiss currency. 

The main geopolitical event this week is another session of trade talks between the U.S. and China on Thursday. Although it's a little early to expect a formal agreement to be reached, opening statements might give a flavour of the mood between the two countries and could impact on markets.

Eventually, a deal is expected by the end of April when President’s Xi Jingping and Donald Trump meet for an official signing ceremony.  

Global investor sentiment could be further impacted by economic data due out of China, which has seen growth slow during recent quarters. This could be about to change though, according to analysts at Danske Bank.

They say there is a link between Chinese economic growth and metal prices. Since many metal prices have risen this year, Danske appears to be inferring that the economy will soon follow suit.

This view is not shared by all analysts though. Hunter Chan, a greater China economist at Standard Chartered, says Chinese growth is set to slow even further this year.

“Our China nowcasting model points to GDP growth of 6.2% y/y in the first two months of Q1-2019, easing from 6.4% in Q4-2018. The estimate is based on 42 monthly time series of key economic indicators, including retail sales, production, investment, fiscal, market interest rate and trade data,” Chan writes, in a recent note to clients.

As far as domestic developments are concerned, the Swiss National Bank (SNB) will publish its quarterly bulletin at 14:00 London time on Wednesday, although its monetary policy stance has already been well telegraphed to the market so the bulletin is unlikely to have much impact on the Franc.

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The Pound: What to Watch

The main event for the Pound in the week ahead will be the third parliamentary vote on the government’s EU Withdrawal Agreement, although an exact date is yet to be set. 

If Parliamentarians support the bill the UK will leave the EU on May 22 under the Withdrawal Agreement. But if MPs reject it then there the government has said it will offer a series of "indicative votes" to MPs, giving Parliament an opportunity to express its desired course.

At that point there will still be a risk that the UK leaves the EU without a deal and the key date in focus will be April 12, although this could change the moment the EU agrees to a further extension, if and when it does. 

If Parliament was succesful in foisting another referendum or a general on the electorate, another much longer extension is sure to be required, alongside participation in the EU parliamentary elections. 

However, and alternatively, if Parliament was to back the idea of a customs union with the EU or some other model of post-Brexit relationship it's possible that no further extension would be required as the details of such a relationship would be thrashed out in the second stage of the negotiations.

But the government must notify the EU of the path it intends to take before April 12.

“Leaving on April 12 without a deal is now the default path, and while that will most probably be avoided at the end, the mere fact this massive risk still lurks in the background is likely enough to keep sterling under pressure for now,” says XM's Hadjikyriacos.

On the data front, the next key release for the Pound is the final estimate for final quarter GDP growth, due out at 09:30 on Friday. Consensus is for growth to be confirmed at 0.2% for the final quarter and 1.4% for 2018 as a whole.

 

 

 

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