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Swiss Franc Down on SNB’s Active Role In Currency Markets

The Pound began 2017 on a weak note against the Swiss Franc, a safe haven currency. Economists expected the outcome of the Brexit referendum to affect the UK economy considerably. However, the UK economy continued to roll on mainly due to a strong domestic consumption.

The weak Pound also boosted exports later in the year. Finally, the 25 basis point rate hike sparked a rally in the Pound against its rivals. Thus, the GBPCHF pair ended 2017 at about 1.3150 levels, up 600 basis points from a year ago. We expect a continuation of the uptrend due to reasons given below.

The UK unemployment rate stood at 4.3% in the quarter ended October 2017, the lowest in four decades, according to a report from the Office for National Statistics. The number of unemployed people was 1.4 million at the end of October, down 26,000 from a year earlier. Average weekly earnings increased 2.5% in the three months through to the end of October. However, it was still behind the inflation rate of 3.1%. The Bank of England also raised the overnight benchmark interest rate by 0.25% to 0.50% in November to bring down inflation. An increase in the interest rate normally favors the domestic currency. Further, according to Athanasios Vamvakidis, a currency strategist at BAML, the Pound remains the most undervalued G10 currency.

The Swiss Franc, on the other hand, remains one of the overvalued currencies, at least according to the Swiss National Bank. In December, the SNB once again affirmed that it will continue to play an active role to weaken the Swiss Franc. Currently, Switzerland has a negative interest rate of 0.75% and the central bank has announced that it will continue to maintain negative interest rates to achieve its inflation target rate of 2%. The central bank expects inflation rate to reach 0.7% next year. Thus, a negative interest rate and central bank intervention are expected to keep the Swiss Franc bearish against the Pound in the week ahead.

The GBPCHF pair is moving along an ascending trend line as shown in the image below. The currency pair is also moving above its 50-day moving average. The bullishness is also confirmed by the crossover of the money flow index indicator above the reading of 50.

GBP/CHF Pair: January 2nd 2018

GBP/CHF Pair: January 2nd 2018

To benefit from the uptrend, I am planning to go long in the GBPCHF pair near 1.3150, with a stop loss order below 1.3040. If the forecast turns out to be true, then I will dilute my long position near 1.3280.

Further, if the situation permits, I may use the surplus money to place a bet on a call option offered by a binary broker listed here. The option should remain active until January 10. I may enter the trade only if the pair trades near 1.3150 in the Forex market.

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