Volatility is a common state for GBPCHF. On its own, the British pound is highly susceptible to its own economic troubles and paired with the franc, the influence of risk appetite can generate sizable waves in price action. However, with dour fundamental projections leveling out among most of the global economies and prominent drivers for sentiment dying down, the recent technical congestion developed by this pair may have found itself fundamental support.
Why Would GBPCHF Hold a Range?
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· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 1.7290 (Reversal, Fib)[/B]
[B]-Range Bottom: 1.6650 (Range, SMA, Fib, Trend)[/B]
· Event risk-based volatility may pick up after the weekend. Looking at the UK docket, the first revision of first quarter GDP may be considered a stale update; but considering the significant adjustments noted in other economies and the severity of the economy’s recession, this indicator could be another exception. Outside of the calendar, the general flow of risk appetite has lost some of its influence on price action; but the SNB’s intervention hasn’t.
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· From a technical perspective, the congestion that GBPCHF isn’t what we would call ‘clean.’ We have seen a steady rise in swing lows; but there is no definitive trend developed from this bias. Support is our primary concern with a Fib confluence and 50- and 100-day SMA backing up the range low that has been carved out since the beginning of April.
[B][I]Suggested Strategy[/I][/B]
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· [B][U]Long[/U][/B][B]: Half-sized entry orders will be placed at 1.6720 which is well above our range low.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 1.6560 is very wide given our entry; but necessary because of volatility. 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 (160) at 1.6880 and the second[/B][B] target will be 1.7100. [/B]
[B]Trading Tip[/B] – Volatility is a common state for GBPCHF. On its own, the British pound is highly susceptible to its own economic troubles and paired with the franc, the influence of risk appetite can generate sizable waves in price action. However, with dour fundamental projections leveling out among most of the global economies and prominent drivers for sentiment dying down, the recent technical congestion developed by this pair may have found itself fundamental support. Our primary interest is to the long side, due to the presence of a solid zone of support and the SNB’s insistence in forcing the franc lower through intervention. The strategy sets a high entry (with a sizable buffer above what we would considerable hard support); but that is necessary in case the market reverses course before the extreme lows of the zone can once again be plunged. Obviously, with a 160 pip stop (even if they are franc pips), notional risk is too high and requires an adjustment to position size. We will use orders half our normal size; but caution may encourage positions even smaller. Considering the weekend is fast approaching, the entry orders should at least be tagged. Otherwise, we will cancel all pending orders before Friday’s close. What’s more, if spot should hit 1.6950 or 1.6650 before entry, the entry orders should be canceled.
Event Risk for UK and Switzerland
UK – A global consensus is an uncommon thing in the currency market; and when one does arise, it is usually the beginning of the end as it turns to common knowledge. The IMF has forecasted for the United Kingdom the worst economic recession in the developed world. This has been a sentiment that the pound traders have had for many months before hand – and subsequently the reason that the sterling has fallen so far. However, there is always a point of equilibrium where the projected malaise in the UK will match that elsewhere around the globe. The data that comes down the wire at this point is used to push back or move up the time when the UK meets a fundamental equilibrium and eventually overtakes it. No single indicator will have as much influence in altering the pound’s future as the GDP figure due next Thursday. While this is a revision, an adjustment like that seen in the US and expected from Japan could surely alter the outlook for the future. The Bank of England minutes, CPI and Industrial trends data will all have their impact; but it will likely be far more reserved.
Switzerland – This morning, SNB board member Jordan opined that the Swiss recovery won’t come until 2010. He also stated that the central bank was actively implementing its policy of currency intervention. This mixture of physical and verbal intervention is perhaps the most aggressive a policy authority has taken in years. What’s more, it significantly alters the influence of risk trends and traditional indicators that normally elicit volatility from the franc. There are few speed bumps for general sentiment over the coming week; but the retail sales figures and ZEW survey could certainly give us some fundamental color. Data for May 15 – May 22
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[B]Data for May 15 – May 22[/B]
[B]Date (GMT)[/B]
[B]UK Economic Data[/B]
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[B]Date (GMT)[/B]
[B]Swiss Economic Data[/B]
May 17
Rightmove House Prices (MAY)
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May 15
Retail Sales (Real) (MAY)
May 19
CPI (APR)
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May 20
ZEW Survey (MAY)
May 20
Bank of England Minutes
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May 22
Money Supply (M3) (APR)
May 22
GDP (1Q P)
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Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at <[email protected]>.