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Pound-Franc Rate's Rally Bounces into a 'Glass Ceiling'

Swiss Franc

Image © Pavel Ignatov, Adobe Images

- GBP/CHF bumps up against tough resistance

- Short-term uptrend tipped to possible break through

- Main driver of Swiss Franc is ECB meeting

The Pound-to-Franc exchange rate is trading at around 1.2238 at the time of writing, after falling 0.92% so far this week.

Studies of the charts are increasingly bullish and suggest the establishment of a new uptrend, though tough resistance stands in the way of further gains and longer-term charts are ambiguous.

The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows how the pair appears to have started a new short-term uptrend.

GBP to CHF

The exchange rate has just touched resistance at the 1.2250 level - a major historical support and resistance level - and if it can break above the 1.2265 level it will confirm a continuation higher to a target at 1.2500.

The RSI momentum indicator has just exited the overbought zone which is a bearish sign and suggests the risk of a pull-back down to perhaps 1.2100 and the top of the box pattern.

Following that, however, there is a chance the uptrend will resume and push the exchange rate back up for another test of the support and resistance level.

The daily chart shows how the pair has formed a high probability 3-bar continuation pattern and broken above the 50-day moving average (MA). These are both quite bullish signs.

Daily GBPCHF

The uptrend could extend higher conditional upon a break above the 1.2265 level, eventually reaching an upside target of 1.2680 where the 200-day MA is situated.

Momentum is strong and supportive of further gains.

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 shows how the pair peaked in April and then started a medium-term downtrend until it bottomed in August.

Weekly GBPCHF

The rebound from the August lows has seen the market rise in 4 up-weeks in a row; the current week is also showing gains. The short-term picture looks constructive.

The exchange rate is currently pressing up against tough support and resistance. This could be a glass ceiling above which evolution may be difficult. There is a risk of a correction.

Nevertheless, there are growing signs the bullish trend could extend, and if so the pair will probably reach a new target at the level of the 50-week MA at 1.27.

The weekly chart is used to give us an indication of the outlook for the long-term defined as the next few months.

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The Swiss Franc: ECB and Global Risk Trends in Charge

The main drivers impacting on the Swiss Franc in the short-term are the European Central Bank (ECB) policy meeting on Thursday and general global risk trends.

The ECB meeting could impact on the Franc if it leads to a sharp fall in the Euro as the Swiss authorities will want to prevent too much of a depreciation against the Franc so as to protect Swiss exporters.

This tends to be why Swiss National Bank (SNB) policy usually follows ECB policy.

The consensus expectation amongst economists is that the ECB will ease policy on Thursday but there is much debate about the extent to which it will ease.

If it is aggressive and announces a revival of quantitative easing - the printing of money to hoover up assets such as corporate and government bonds - the Euro is likely to weaken. In such a scenario the SNB will probably follow suit with further easing or direct intervention in order to try and keep the CHF and EUR closely aligned. The Swiss economy tends to struggle when its currency becomes elevated relative to the likes of the Dollar and Euro, as Swiss exports are priced out of the global market.

This is likely to weaken the Swiss Franc across the board, including against the Pound, leading to gains for GBP/CHF.

“The SNB will be seeking to maintain the EUR/CHF cross at competitive levels for its export market to European nations - Indeed, there have already been signs that the SNB has recently intervened in the FX market have distorted demand for the CHF - CHF net shorts pulled back a little ground having dropped heavily the previous week on increased demand for safe-haven assets,” says Ross J Burland, an analyst at FXStreet.

One problem the SNB have is that they may lack the tools to fight an appreciation in the Franc. Interest rates are already the lowest in the world at -0.75% making any further reduction problematic.

Swiss banks are already struggling from the loss of billions of Francs of lost revenue from being charged to park their money at the SNB. Lower interest rates also reduced profit margins on loans.

The problem with direct intervention in the FX market is that it risks Switzerland being branded a currency manipulator by the U.S, with serious consequences for trade due to the imposition of sanctions.

The Swiss Franc has lost ground recently after safe-haven flows dried up as trade tensions eased on prospects of a U.S. -China trade deal in October.

The U.S. and China have “made a lot of progress” according to US Treasury Secretary Mnuchin, although this would not be the first time he has said so.

More concretely, it was reported that China may have offered to make farm purchases demanded by President Trump. “However, this offer is reportedly contingent on a potential delay to the October 1 tariff increases,” says Citibank, in a recent client note.

Other bank analysts are more circumspect about purported breakthroughs in the trade war.

“We remain sceptical that trade talks over coming months will yield a comprehensive agreement that ends the US-China trade tensions. We’ve been down this path so many times over the past 18 months, with hopes of progress ultimately dashed,” says Doug Steel an analyst at BNZ Bank.

Nevertheless, if seasonal trends are to be believed the worst for global risk assets is now over and from here on into the end of the year risk aversion should ease, suggesting a negative backdrop for the Swiss Franc and other safe-havens.

Technically, gold - another major safe-haven - is bumping up against major resistance and vulnerable to declines.

A volatility indicator called the VIX is also looking like it is about to breakout of a range to the downside, which is further suggestive of an unwinding of tensions and rebound in risk appetite.

These signs from other markets do not particularly support the outlook for the Swiss Franc.

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