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USDCHF strength possible after SNB warns of weakening franc if needed

The markets are waiting for the flash PMI data today and some headline news out of the NATO summit which will conclude today. North Korea sent an unidentified missile into Japanese waters, most probably unintentionally, but still adding to the global nervousness around the situation with Russia. The forex pairs are not signalling a clear risk sentiment, but traders will be looking for zones where the Swiss franc is overvalued and will anticipate the SNB intervening. Whether the SNB does is to be seen and maybe the forward guidance will be enough to get the job done.

Market Brief

Our weeks of central bank commentary and rate decisions are ending. This morning, the SNB as expected delivered its rate decision without altering monetary policy. In their statement, they said that the CHF is classified as highly valued and that they would be willing to intervene in the foreign exchange markets as necessary to counter upward pressure on the franc.

The USDCHF has found support from the daily 20-period EMA and with the SNB’s willingness to depreciate the franc, when necessary, traders may take this test of support as a buy the dip opportunity. The Weekly 200-period EMA is sat at 0.9400 and was acting as a resistance level last week. A second test could have a better chance of a continuation higher as sell orders would probably have been fully removed or weaker sellers would pull their orders.

With the SNB aside we can now concentrate on the flash March PMI data, which will provide the first indication of how the Ukrainian crisis has affected the UK, US, and Eurozone economies. German Flash data came in better than expected and now we’re waiting on the wider euro area data.

Treasury bond yields are still up on the week, despite yesterday's modest rally in the benchmark bonds as traders move into safe-havens and commodities. Meanwhile, UK gilts continue to slide following the dovish rate hike from the Bank of England a week ago. The pound sterling is up against the euro but down versus the US dollar overnight. UK consumer confidence has fallen sharply and the outlook from the chancellor shows things are set to get worse for UK consumers before they get better. The Office of Budget Responsibility said that the chancellor's measures to help households will likely only mitigate about half of the further pressures caused by rising prices of essential goods and services.

The GBPUSD could be staging a counter-trend rally after yesterday’s pullback into an area of balance failed to take out the previous day’s lows. If this price action is signalling a bullish change, we could see GBPUSD back up to the daily 200-period EMA and the 1.3500 level. According to analysts, the manufacturing and service PMIs in the UK will decline and if so the sentiment towards the pound could change on that data point or we could at least see a spike lower, so it would be best to wait for the data to be released before initiating a trade. Currently, the UK consumer spending outlook is particularly uncertain given the impact of rising inflation on real household spending power.

Analysts anticipate steep declines in the Eurozone for both service and manufacturing too. It should be noted that in all cases if the PMIs remain above the 50-level, this is signaling expansion but the monthly trend lower will be of concern to the markets. On the flip side if the decline is less severe this will be seen as a positive and so we could see a relief rally. It seems likely that the US economy will be less directly impacted by the crisis, and they may actually be a net beneficiary if Europe looks to the US after turning its back on Russia.

Expect more hawkish rhetoric from the Federal Reserve. Markets will be watching for indications that a 50-basis point rate hike is more likely at the next meeting, considering the likelihood of several more interest rate hikes this year. If EU PMIs all come out better than expected or if we have a shift in the news coming out of Ukraine, the euro could catch a bid for the rest of the day and this would put downward pressure on the US dollar index. Currently, 99.00 is acting as significant resistance and the rising channel is likely to break to the downside. Because the price action has basically gone sideways for the month of March trading the greenback is becoming harder.

The forex heatmap also offers no clues to which way the overall sentiment is going, so trading safe haven weakness against US dollar relative strength or Canadian dollar positive flows is about the best we can decipher at the London open.

Macro views in a nutshell. While markets fell overnight, they began the session in London off their lows. President Biden will address NATO leaders about Ukraine today. A US-EU deal is reportedly close to lowering Europe's dependence on Russian energy.

The FTSE100 and German DAX40 are in a consolidation pattern, though the DAX is up against dynamic resistance from the daily 50-period EMA and the FTSE is above the averages. If anything a break of yesterday’s high in the FTSE could lead to an easier long trade than trying to fight resistance levels on the DAX.

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