ECB could turn Swiss Bank's old 1.20 floor into new ceiling

April 25, 2018 01:45 PM

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In January 2015, the Swiss National Bank, in a move that took everyone by surprise, decided to remove the then floor of 1.20 in the euro/Swiss franc (EUR/CHF) currency pair exchange rate, despite repeatedly promising to defend that level at all costs and for as long as necessary. Rates literally tanked more than 2,000 pips in a matter of minutes as the franc skyrocketed.

Fast forward just a little more than three years, the once popular currency pair last week managed to rise back to that 1.20 hurdle again, thus making back all of its SNB-related losses. Of course, the SNB has made no mistake about being active in the foreign exchange market and the resulting weakness in the franc is proof of that. But where do we go from here? If the 1.20 level was too high then, it surely is still the case now.

After all, there’s still no signs of inflation in Switzerland overheating despite the softer exchange rate. At 0.8% year-over-year, CPI inflation in Switzerland remains among the lowest in the major economies. What’s more, there is now the possibility that the European Central Bank may reinstate its dovish policy stance again given the recent weakness in Eurozone data, most notably in Germany. The ECB policy statement and ECB President Mario Draghi’s press conference will, therefore, be in focus tomorrow. If the central bank revises down its economic growth or inflations forecasts or otherwise hints at the prospects of delaying policy normalization process, then the euro could drop sharply. If this happens to be the case the EUR/CHF could fall in euro’s slipstream. The safe-haven franc meanwhile may also get a boost from the prospects of further falls in the stock markets.

So, there is a possibility that the old floor of 1.20 may now act as a ceiling, at least in the short term anyway. With the 1.20 representing such an important psychological barrier, the EUR/CHF’s hesitation to push above it is hardly surprising. Thus we may see further profit-taking and renewed selling pressure here in the days to come, especially if the ECB turns dovish again. That being said, the trend is still bullish and there are lots of key levels that could potentially support prices, so the downside could be limited. Among others, 1.1885 is important level in that it was the base of the breakout that led to the move to 1.20. As it happens, 1.1885-ish also corresponds with the bullish trend line, which comes in just above the 21-day exponential moving average. But the key support range is further lower, between 1.1800 and 1.1830. This area had been resistance in the past and so could turn into support upon a potential re-test.

Meanwhile, if the 1.20 hurdle gives way then there’s not much in the way of further resistance until 1.2065/70, the 127.2% Fibonacci extension level of the most recent drop.

About the Author

Fawad Razaqzada is market analyst at FOREX.com and City Index brands of Gain Capital.