GBP/CHF Range Testing Critical Pivot Level

The British Pound has fallen out of favor with traders as concerns grow that the austerity measures underway by the new coalition government will stall growth going forward. A dimming picture for the global economy has added to the bearish sterling sentiment especially against safe-haven currencies. The Swiss Franc has regained its status as a place of shelter for concerned traders as debt issues and banking concerns have faded in Europe. Previously the Swissie had been in lock step with the Euro as its economic fortunes are tied to the region’s demand for its goods. However, economists are starting to sound the alarms bells over the European banking system again, renewed concerns could lead to a recouping of the currencies and Franc weakness. Although the sterling isn’t immune to the region’s ills, its exposure is at a much smaller level.

Levels to Watch:

-Range Top: 1.6900 (Range, Pivot)

-Range Bottom: 1.5800 (Range, SMA)

Charts created using Strategy Trader– Prepared by John Rivera

Suggested Strategy

• Long: Place an entry at 1.5800
• Stop: Set the stop to 1.5700-100 pips in risk
• Target: The first target is 0.7300

Trading Tip – Support at 1.5800 has withstood several prior tests increasing its validity as a potential reversal point. Additionally, the pair has only traded below the level once and that was at the height of the credit crisis. Although fears are building, the level of uncertainty would have to grow exponentially to reach those levels. Therefore, a brief bout of risk appetite may be enough to provide the price action needed to make our set-up profitable. Traders should be nimble on this trade as 1.5900 could also be a level of support and given today’s sharp decline we could see a significant retracement come underway ahead of our entry point.

Event Risk for U.K. and Switzerland.

U.K. – The second reading for 2Q GDP is ahead but with forecasts for the initial readings to stand up without revision it may be a non-event. However, a significant revision in either direction could impact sterling sentiment, but the lagging indicator may not posses enough of an impact to generate a sustainable trend. The PMI manufacturing reading will have a much greater impact on the outlook for future growth as the sector has been its main source.

Switzerland – Swiss fundamentals may have little market moving potential, especially with the Franc regaining its safe haven status. However, the most meaningful releases are on tap including 2Q employment and the SVME-PMI manufacturing survey. The KoF leading indicator and UBS consumption gauges are significant measures of the pace of growth and shouldn’t be overlooked for their implications for the sustainability of the recovery.