EURCHF extends rebound on diverging ECB and SNB policies

Last week saw the Swiss National Bank offer absolutely no hints about the prospects of tightening in the foreseeable future. The SNB was surprisingly relaxed about the currency’s recent strength, though, as it once again described the franc as merely being "highly valued." But in a somewhat dovish move, the SNB lowered its inflation forecasts for 2019 and 2020 while suggesting that "the pace of growth is expected to slow slightly." In contrast, Mario Draghi, the European Central Bank President, was quite bullish on Eurozone inflation outlook yesterday, when he said the ECB sees 'relatively vigorous pick-up in underlying inflation' and that 'domestic price pressures are strengthening.' His comments caused the euro to rise.

The EUR/CHF has gained ground as speculators have been reminded once again that the ECB and SNB’s interest rates will likely go their separate ways for a while – with the former set to hike at the end of next summer while the latter is expected to remain on hold for the foreseeable future. So, the fundamental outlook for the EUR/CHF remains bullish in the long-term, as the disparity between monetary policies of the two central banks grow.  Even if the franc were to strengthen further and the EUR/CHF falls, say, below 1.10 again then the SNB is very likely to intervene by scooping up euros and dollars aggressively. So, whichever way you look at it, the downside for the EUR/CHF looks to be limited.

From a technical perspective, the EUR/CHF is showing further bullish price action as it has done ever since holding its own above long-term support at 1.12. It has now climbed above short-term resistance in the 1.1300-1.1335 range. However as we go to press, the EUR/CHF had reached another potential resistance around 1.1370, a level which had been support and resistance in the past. So, there was a possibility for a short-term pullback here. However, it appears as though a low has been formed, so we expect the dips back to support levels to be bought. For extra confirmation, we would like the EUR/CHF now to make a higher high above 1.1450. In doing so, it will have broken its bearish trend line and also the 50-day moving average.

This bullish outlook would become invalidated in the event rates were to break below 1.1200 in the coming days and weeks, although the odds of a bullish breakout will fall sharply should 1.1300 break on a daily closing basis now. So, ideally (from a bullish point of view) it would be best if the EUR/CHF stays above 1.1300 now.