Subdued Swiss Price Growth Would Validate the Bullish USD/CHF Technical Outlook
Annualized consumer prices in Switzerland are forecasted to expand 1.0% in February, with economists expecting inflation to advance 0.2% from a month ago. Meanwhile, a report by the Federal Statistics Office in Switzerland reported that producer and import prices eased in January, with the reading retreating 1.3% from a year ago. Furthermore, the GDP report for the region showed that the growth rate rose an annualized 0.6% in the fourth quarter to top forecasts for a 0.5% contraction, and price pressures may strengthen in the upcoming months as Switzerland recovers from a yearlong contraction, led by a revival in exports and company spending. It is also noteworthy that the Swiss National Bank has cut interest rates close to zero in order to encourage a sustainable recovery, and purchased foreign currencies to halt the its currency’s appreciation against the euro.
Switzerland faces its worst economic slump in nearly three decades amid the buoyancy in the franc, which has fueled the risk of deflation by making imports cheaper, and going forward, “the risks of deflation still prevail at the moment,” as central bank Governing Board member Thomas Jordan announced on August 25th. In order to prop up consumer prices, the SNB has started selling the franc in March. However, if the inflation rate holds steady at 1.0% or falls back from its current level, we will favor a bearish outlook for the single-currency, and this will add support for the bullish USD/CHF technical outlook, providing justification for a long position.
USD/CHF: Following the recent crossover above the 200-day SMA which has held as a line of resistance since May 2009, the pair looks poised to test a soft target of 1.1000, followed by 1.1100 in the near term, and downside risks should be capped around 1.0500. Adding to our bullish outlook on the pair, the COT index signals for further CHF weakness as the Swiss index has recently turned from zero, indicating a turn from extreme pessimism.
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Written by Michael Wright, Daily FX Research
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