EUR/CHF intermarket: watching German 2 years, SNB and the Fed

Currently, EUR/CHF is trading at 1.0818, down -0.40% on the day, having posted a daily high at 1.0872 and low at 1.0815.

EUR/CHF has been capped as we await the outcome of tomorrow's ECB. Recently, the ECB has offered mixed communications in respect to monetary policy. “In our view, the pricing of hikes from ECB is very premature as the inflation outlook should not be strong enough to tighten the monetary policy this year," explained analysts at Danske Bank, adding, "another argument for hiking rates could be that banks were suffering after the long period of negative policy rate but it does not seem to be the case that the ECB wants to hike just to support the banking sector.”

• ECB dampened the market’s speculation on rate hikes – Danske Bank

In respect to the swissy, markets turned risk-on post the first round French election resulted that favoured the euro on a broad sentiment that Macron will win and that all will be ok, for now, in respect to the euro and EU project. The strange reaction in the swiss can be explained perhaps due to the SNB's recent intervention looking to mitigate CHF appreciation.  With the bank pulling the supply in the swissy, the currency managed a bid vs the greenback while EUR/CHF took off on the election results. 

ECB and German two-year spreads to weigh on EUR/CHF?

We now await the ECB tomorrow. If the ECB does not tweak its securities lending program tomorrow, the 2-year German yield rate is likely to fall back into deeper negative territory as the pressure spurred by the shortage of short-term German paper, weighing on the euro. With the prospect of a June Fed hike that is increasing, this too could weigh on the eur and be felt over in a weaker EUR/CHF cross. The SNB may even start to tolerate a weaker EUR/CHF rate where it has previously tried to defend a floor of 1.07 despite lows of 1.0630 this year. 

"Apparently, the hawks at the ECB warn that the forward guidance can change in June," explained analysts at Brown Brothers Harriman, adding, "even if it materializes, the Fed could be delivering its third hike since last November's election.  Around the time, the ECB may announce that it will slow its asset purchases with an eye to wind down the program, the Fed may be starting to shrink its balance sheet."

EUR/CHF levels

EUR/CHF exploded to the upside and has now risen above the September-to-April resistance line at 1.0825 which means that the December peak at 1.0899 may also be reached, as explained by analysts at Commerzbank. "There the cross should stall, however. While this is the case, a gradual slide back below the 200 day moving average at 1.0781 could still unfold. We will retain an overall bearish view while no rise and daily chart close above the 1.0899 December peak is seen. Were this to happen the July-to-September highs at 1.0944/1.1000 would be in focus."