USDCHF Reversal Underway
Feels like I’ve been saying this a lot recently but it’s been another hectic week for markets with plenty of big moves across the board. Important to remember that we don’t always get this type of volatility so its important to make the most of it. Certainly, a plentiful time for momentum traders. However, the move that seems to be capturing the most attention this week was not a breakout move but a correction. In FX the pullback in USD has caught quite a few traders offside this week. In terms of specifics, the almost 4% drop in USDCHF has been the standout move. So, let’s take a look at what caused this and, as ever, if you caught it? Well done! If you missed it? There’s always next week!
What Caused the Move?
USD Falls On Growth Fears
There are two parts to this story, the first is USD weakness and the second is CHF strength. On the Dollar side of things, It’s been an interesting week. We heard from Fed chairman Powell mid-week who seemed to be lining the market up to expect more aggressive action from the Fed. Powell warned that the Fed will keep going with rate hikes until inflation is brought under control, with the Fed willing to lift rates above neutral if necessary. These comments come just a week after Powell also opened the door to larger than .5% rate hikes, again explaining that the Fed stands willing to do whatever necessary to beat inflation.
Looking at the reaction in USD, however, it seems the market is focusing more on the growth side of things. Aggressive tightening from the Fed alongside rampant inflation and ongoing supply-chain issues is exacerbating fears of a slowdown over the second half of the year. The Fed itself has warned that it might not be able to avoid a hard-landing and so for now, USD is seeing outflows.
SNB Turns Hawkish
In terms of the rally in the Swiss Franc, the driver behind the move was the hawkish shift from the SNB. While the SNB has been one of the few G10 central banks to stick to its easing stance over recent months, that narrative was thrown askew this week. SNB chairman Jordan announced that the SNB is “ready to act” on inflation. With the SNB now looking likely to join the tide of central banks embarking on a tightening path, CHF has seen strong inflows, replacing USD and JPY as the safe-haven of choice for now.
The reversal lower from the 1.0020 level has seen USDCHF trading back down to retest the broken bull channel. With the retest currently holding as support, focus remains on a continuation higher medium-term. However, with both MACD and RSI turned bearish here the risk is that the pair breaks down below the current support, opening the way for a test of .9424 next.