EURCHF coils at the highs - breakout pending?

It’s been another turbulent week in the FX space with potential trade wars, moves in the Canadian dollar and Japanese yen accounting towards the bulk of the hype. This is all well and good if you were able to trade such moves but, if not, we’d propose looking at currencies which suggest range expansion is just around the corner. And one such pair we’re closely watching for this very reason is EUR/CHF.

Since the 2017 low, EURCHF has remained predominantly bullish, although that is not to say it has been the prettiest of trends throughout. Between August ’17 and early January ’18 EUR/CHF found itself grinding higher and its messy trend structure produced unforgiving overlaps between peaks and troughs.

Yet since retracing from the 1.1831 high and subsequently rebounding from bullish trendline, price action is now displaying the qualities of a cleaner trend.

Taking a closer look at the daily chart the compression is easier to see, and it is worth noting the shallow retracement. As 38.2% retracement is generally considered an orderly pullback, its failure to even retrace this far is a testament to the underlying bullish momentum. At time of writing the retracement hovers above the 23.6% Fibonacci level, and interestingly the prior four closes have been on (or very near) 1.1687 to show further support above the Fibonacci level.

Moreover, we see minor signs that bullish momentum is picking up again to suggest a break higher could be pending. Yesterday’s session closed with a bullish engulfing candle and today’s trading range remains in the upper half of the engulfing candle. Admittedly the engulfing candle hasn’t closed to a new range, but it appears to be a subtle shift in the dynamic of this range which is moving away from narrow-ranged candles.

From a tactical standpoint we see two options to enter for a long position. Either trade a break of the 1.1715 with a view to move above and beyond 1.1740. Or for a more conservative approach, wait for a break of 1.1740 to target the 1.1815-31 highs.

Whilst we have identified a low-volatility currency in hope of anticipating range expansion, there is no guarantee the next volatile spike will go in our chosen direction. If range expansion chooses to send EUR/CHF markedly lower, then it would be removed from our watchlist until further notice.