GBP/CHF could surge as SNB responds to ECB's policy; UK GDP eyed

It has been a slow day in the FX markets today after last week’s ECB-inspired sell-off in the euro had raised volatility across many currency pairs. But one currency that has caught some attention today is the Swiss franc, which has been sold heavily in response to comments from the Swiss National Bank’s Vice President. In a Swiss newspaper on Sunday Mr Fritz Zurbruegg said that the SNB would be analysing the impact of the ECB’s policy moves, hinting at the prospects of further intervention by the Swiss central bank should the ECB expand QE in December, and that the negative interest rates will remain in place for as long as necessary. Zurbruegg’s comments have caused the CHF to fall across the board, with the EUR/CHF rallying noticeably sharply.

The GBP/CHF meanwhile has also rallied and it could be in for even bigger moves on Tuesday should the preliminary estimate of the UK’s third quarter GDP provides a cheerful surprise. The analyst expectations are centred on a 0.6 per cent rate of growth for the July to September quarter, which would be a touch lower than the 0.7 per cent growth recorded in the second quarter.

Tuesday’s UK GDP data aside, the growing disparity of monetary policies at the Bank of England and the Swiss National Bank suggest the GBP/CHF could appreciate a lot further over the coming months as investors seek higher yields. Although a potential rate increase from the BoE may still be at least 6 months or so away, it is still much more likely that it will hike rates well before the SNB does. In fact, the SNB may even lower interest rates further into negative from their current -0.75% in order to keep its currency competitive against the euro, with the latter likely to fall as the ECB prepares to beef up QE in December.

Technical outlook: GBP/CHF

From false breaks come fast moves in the opposite direction. The GBP/CHF may have formed a big reversal formation when it failed to hold below the technically-important support around 1.4600 a couple of weeks ago. As well as the previous low, this is where the 50% retracement level of its upswing from the May low converged with the 200-day moving average. As the bears failed to crack this level, the bulls have stepped back in, driving rates all the way to 1.5075 so far. The GBP/CHF has broken several resistance levels on the way up, including a bearish trend line and a short-term swing high at 1.4925 at the end of last week. This level is likely to turn into support upon a potential re-test.

At the time of this writing, the GBP/CHF was trying to break another important resistance and the 61.8% Fibonacci retracement of the move down from the August high at 1.5075. Above here, there is little further resistance seen until 1.5190, a previous resistance-turned-support level. Thereafter is the key resistance and psychologically-important level of 1.5500, which comes in just 45 pips below the January 2015 high of 1.5545 – the day when the SNB unexpectedly dropped its CHF 1.20 peg against the euro. A major continuation is likely to follow if this resistance range breaks down, though the Fibonacci extension levels may offer some interim resistance at 1.5645 (127.2%) and then at 1.5950 (161.8%).

On the downside, support comes in at 1.4925, a break below which could initially pave the way for the 50-day average, currently at 1.4865/70. If this area fails to offer support, then a potential move back towards the 1.4600 area could be likely.

Figure 1: