Watch out for a larger GBPCHF breakout trade
The risk-off trade when global growth is put into question results in traders moving into safe-haven currencies like the Swiss franc or Japanese yen. The fundamentals are not great for Japan as they are still struggling to contain the COVID-19 pandemic, which has now all nut ruined the summer Olympics. The Swiss National bank is also known to intervene in the forex markets when they feel the franc is too expensive.
Forex Analysis GBPCHF
The current state of affairs within forex land looks like sentiment has turned bearish and a move into the safe havens of the Swiss franc and Japanese yen are the trades of the London session to be in
The single currency is also holding its head up against the commodity pairs and the US dollar after the FOMC meeting minutes did little more to boost the US dollar. The euro could be about to do a reversal though as the European Central Bank delivers its outlook for the Eurozone economy in an hour’s time.
Trader sentiment on the ActivTrader platform is bearish the GBPCHF currency pair and usually, I would be looking to fade any move that was in line with these traders. However, if we look at the daily chart we can see that the overall trend is sideways.
Today’s price action looks most likely to carry on lower to test the support zone of the current range that started in April 2021. A tend line between the two most significant lows in this channel has been broken by the current price action, but the day's close will be key.
Breakout traders would have had an easy time of it so far during the London session if they had used the prior Asia-Pac range as their guide. The London open was impulsive to the downside and did not test into the prior sessions price action. 2.5 hours after the London open the GBPCHF had moved more than 2X the Asia-Pac range, which would be a lot of trader’s targets for the day met. Placing the stops above the range would have given these traders a risk to reward ratio of 1:2. A move of this magnitude within such a large consolidation period is ripe for a mean reversion trade, which may happen at the start of the US session.
This morning’s GBPCHF move was helped along by a decent Swiss unemployment data release. Their unemployment rate for June came in under expectations at 2.8% and down from the previous month's reading of 3.1%. Tomorrow the UK data drop is May’s balance of trade figure, plus, Manufacturing and Industrial production followed by Construction output.
Looking at the weekly chart, I can’t help but think that the retail traders are expecting a similar drop to the one that occurred before the pandemic in 2020. Back then we had a decent run-up, a sharp weekly drop, before a couple of months of consolidation. This time, however, instead of an impending global pandemic, we have a global vaccination program, and the UK government is relying on science to beat nature.
Other things that are different today than 15 months ago are that we now also know what Brexit looks like, and we have a government still looking to level up the whole country and deliver on their manifesto. The weekly 200 ema is currently doing its best to hold up price action while the 20 & 50 ema rise up. We may get a bit of a look below the current daily range, but I believe this will be a bit of a fake-out, to test the daily 200 ema before the uptrend resumes.
Obviously, if the UK Government has this 3rd wave of COVID-19 all wrong and hospitalizations and deaths exponentially rise, the country will be in disarray and the pound will no doubt collapse. We also have our fingers crossed that the nation can get behind the football team and that we can all get a bit of cheer from the 3 lions winning the Euro 2020 football competition. This in itself could boost GDP by a few basis points on celebratory purchases and good cheer.