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GBP/CHF Descending Channel, Wedge Provide Swing Trading Opportunity

GBP/CHF Descending Channel, Wedge Provide Swing Trading Opportunity

2011-05-25 20:37:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Today’s GDP reading out of Great Britain sparked some enthusiasm among traders as the 0.5 percent quarter-over-quarter reading relieved the market, as many were seemingly expected the data to be revised. The figure in line with expectations, coupled with an OECD report stating that the Bank of England would have to raise rates this year in order to avoid harmful effects of over-saturating the market with liquidity, boosted the Pound across the majors – except for the Franc. The GBP/CHF pair lost 0.25 percent today, as the markets returned to their risk-averse tone, as denoted by the declines by the commodity currencies and the Euro. With the GBP/CHF pair having been range bound hovering around 1.4200 for the past week, coupled with its positioning in the middle of a descending channel dating back to the third week of March, a swing trading opportunity has emerged to collect profits as the Sterling-Franc pair looks to break lower from a near-term descending wedge and move towards its range bottom.

Levels to Watch:

-Range Top: 1.4610 (Trend)

-Range Bottom: 1.3865 (Trend)

-Wedge Bottom: 1.4170 (Trend)

gbpchf_descending_channel_wedge_provide_swing_trading_opportunity_body_Picture_4.png, GBP/CHF Descending Channel, Wedge Provide Swing Trading Opportunity

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Suggested Strategy

  • Short: Place an entry at 1.4170 (Wedge Bottom)
  • Stop: Set the stop to 1.4327 (20-SMA)
  • Target: The first target is 1.4000 (move up stop to 1.4100), second target is 1.3865 (Range Bottom)
  • Timeframe: 3 to 7 days

Trading Tip Even though the GBP/CHF pair has weakened significantly since the beginning of April, when it was trading near a 1.5000 exchange rate, the technical picture calls for further weakness in the near-term, especially considering the pair’s positioning near the bottom of a descending wedge, which, if broken, would signal a sharp breakout lower. The RSI is still declining, now at 39, and has been trending lower since last Thursday. While the MACD Histogram differential briefly turned positive, it is once more at parity, further supporting the notion of a GBP/CHF short. Finally, the Slow Stochastic oscillator issued a sell signal yesterday, with the %K slipping below the %D, at 28 and 42, respectively. The technical picture feats in neatly with the fundamental picture for a GBP/CHF short trade.

Event Risk for the United Kingdom and Switzerland

Both the United Kingdom and Switzerland have an event deemed of medium-significance based on historical impact, though the markets will likely shrug off the reaction given the larger, more dominant trend dominating the currency market: risk-aversion.

United Kingdom – The GfK consumer confidence survey for May is due tomorrow, and given the Pound’s recent depreciation against the safe haven currencies, the estimate of -31 could be a conservative reading. As noted by the GDP reading today, while there is slow growth, that was boosted by the weak Pound and thus a higher-than-anticipated net export reading, the other underlying components of growth remain unconvincing for the argument of a recovering British economy.

Switzerland – Swiss trade data is due tomorrow, and while it could suffer due to the surge of strength of the Swiss Franc exhibited in April, a poor reading is unlikely to hurt the Franc’s march significantly, as the risk-aversion trend will likely remain in place for the next few weeks until the European sovereign debt woes find some resolve. Until then, the Swiss Franc is the safe haven currency for Europe.

Data for May 22 to May 27

Data for May 22 to May 27

Date

United Kingdom Economic Data

Date

Switzerland Economic Data

May 26

GfK Consumer Confidence Survey (MAY)

May 26

Trade Balance (APR)

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

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