USD/CHF: stage set for a big move as Fed meeting looms

Risk assets have surged higher over the past 1.5 days and today the dollar has joined the fun, rising against most major currencies including the Swiss franc. Traders had evidently reduced their long dollar bets ahead of the Federal Reserve’s much-anticipated policy meeting which concludes tomorrow. But it seems like they have now re-established some of those positions. The market is clearly anticipating a rate increase from the Fed. If seen, the US dollar could at the very least show a positive knee-jerk reaction, even if the rate rise turns out to be very small. But this outcome is mostly priced in, so the dollar’s slightly longer term direction will depend on the FOMC’s forward guidance. If the Fed turns out to be less dovish than expected then one should expect to see a sharp appreciation of the dollar. The opposite is also true. But the big risk is if the Fed decides to hold off from raising rates. In this scenario, the dollar could fall dramatically as some traders will clearly be disappointed.

From a technical perspective, the USD/CHF’s recent failure to hold above the January high of around 1.0240 was a clear bearish development, which led to a vicious drop of more than 500 pips from the high to yesterday’s low as the longs rushed for the exists. But the longer-term technical outlook is still bullish, given for example that price is currently holding above both the 200-day average and a year-old bullish trend line. In fact, the long-term bullish trend may have already resumed after the 61.8% Fibonacci retracement level against the October low held as support yesterday. As a result, a piercing candlestick-like formation was created, which is considered to be a bullish pattern.

At the time of this writing, the USD/CHF was testing the 50-day moving average around 0.9920. If the Swissy closes above the moving average then this would be a further bullish development, which could see price make a move towards parity (1.0000) next. The parity, as well as being a psychological level, roughly corresponds with the 38.2% Fibonacci retracement against the recent high, so it is a key technical level. A break above it therefore would be a very bullish outcome. In that case, the bulls may then aim for the 61.8% Fibonacci level at 1.0120 next, followed by the January high of 1.0240.

If however the USD/CHF fails to break through the resistance levels mentioned above, then it may drop back to this week’s low before possibly going for a test of the bullish trend line around 0.9700 or even 0.9655, a level which corresponds with the convergence of the 200-day average and the 78.6% Fibonacci level.