Investor optimism is on the retreat and high risk currencies are suffering while those considered safe havens are reaping the benefits. So far though, this turn for risk aversion has been somewhat restrained. The pull back in investor sentiment was indeed widespread; but the plunge was lacking volatility and wouldn’t spread to the underlying US dollar (the other significant mover over the past week).
Why Would GBPCHF Hold a Range?
[B][/B]
· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 1.8100 (Double Top, Fibs)[/B]
[B]-Range Bottom: 1.7800 (Trend, Fib, SMA)[/B]
· The typical fundamental drivers for GBPCHF have been significantly altered over the past months. Risk appetite is likely still the foremost concern for those market participants trading this pair; yet swings in price and volatility have developed differently from those assets more closely attached to sentiment. As for classic economics, the pound and Swissie are both heavily dependent on the Euro Zone for Trade. Event risk is heavy tomorrow with labor data.
[B][/B]
· A range between the double top at 1.81 and pivot support around 1.78 is very tight for a pair prone to high volatility. However, time frame and reasonable positioning can temper the risk profile of a congestion-based setup. In looking for a long position, we are looking to align ourselves with the general, bullish bias for the year.
[B][I]Suggested Strategy[/I][/B]
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· [B][U]Long:[/U] An aggressive entry of 1.7820 is still well above the recent range of daily lows.[/B][B][/B]
· [B][U]Stop[/U][/B][B]: A stop of 1.7750 is relatively modest as the range itself is small and our time frame is short. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B]
· [B][U]Target[/U][/B][B]: The first objective equals risk (70) at 1.7890 and the second target is set to 1.8010. [/B][B][/B]
[B]Trading Tip [/B][B]– Investor optimism is on the retreat and high risk currencies are suffering while those considered safe havens are reaping the benefits. So far though, this turn for risk aversion has been somewhat restrained. The pull back in investor sentiment was indeed widespread; but the plunge was lacking volatility and wouldn’t spread to the underlying US dollar (the other significant mover over the past week). This does not mean however that momentum on risk trends will hold back indefinitely. Therefore, it is important to be careful when considering a GBPCHF range setup. This pair is comprised of two economies that are highly correlated through economic trade filtered through the European Union. Matching, pessimistic forecasts for growth and what is expected to be an extended period of loose monetary policy balances the risk scale for the pair. Nonetheless, it is tempting fate to bet against a sharp swing in risk appetite. Therefore, we will keep our outlook under time and price action limitations. Since the range we have to work with is only 300 points wide (not much wider than the average range of the past two weeks), the first and second target should be reached soon after entry. We will cancel all open orders by tomorrow as spot is very near entry.[/B]
Event Risk for UK and Switzerland
UK – Risk considerations will play a significant role in fundamental price action for the British pound. While the economy that backs the currency recently reported a deeper recession through the second quarter and financial conditions are struggling to find an even keel, the sterling is still considered one of the top benefactors of a positive shift in investor sentiment. A side effect of being one of the worst performing economies in the OECD is that few others stand to gain as much from a general recovery in global conditions. The economic calendar will further offer more tangible drivers for price action over the coming week. Top event risk over the period is the BoE Quarterly Inflation report. After the central bank announced last week that it was expanding its purchasing program beyond its original limit (Chancellor Darling did agree to the expansion), traders will be anxious to see how exactly how policy makers’ forecasts for growth and financial activity have developed. Aside from this big-ticket release, there is a cadre of other notable indicators on deck. The jobless claims figure is a known volatility catalyst; but CPI and CBI industrial trends orders will have long-term implications for growth.
Switzerland – Scheduled event risk for the Swiss franc is relatively light over the coming week; and the currency’s correlation to risk appetite has certainly diminished over time. However, we should not underestimate the influence speculative interests can have on this historical safe haven currency. Recently, only the Japanese yen crosses have taken to risk; but this is testament to the severity of change in risk appetite rather than its absolute direction. As for data, the retail sales report next week is the only indicator with any fundamental tout; but its experience with volatility is lacking. On the other hand, the strong trade ties between Switzerland and the Euro Zone could draw a sympathy move to notable changes in German and regional 2Q GDP numbers.
Written by: John Kicklighter, Currency Strategist for DailyFX.com.
Questions? Comments? You can send them to John at <[email protected]>