Three year high inflation turns Pound stronger

Better than anticipated services PMI reading for March has enabled the Pound to consolidate against the Swiss Franc at 1.2480 levels.

Historically, Pound used to rally against its rivals in April.

That also factored in the rise of the Pound against the safe haven currency Swiss Franc.

While there are contrarians who believe that Brexit related talks would again pull down the Pound, we expect the currency pair to rise further in the short-term due to reasons mentioned below.

The headline inflation hit a three-year high of 2.3% in March, according to the Office for National Statistics. On an annualized basis, analysts had anticipated a 2.2% increase in the consumer prices. The reported figures were unchanged compared to previous month. The increase in inflation was mainly due a rise in the fuel prices on account of weakened Pound.

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The Office for National Statistics also announced that the price of goods and raw materials purchased by the manufacturers – referred as Producer Price Index (PPI) – increased 0.4% m-o-m in March, versus analysts’ expectation of a 0.5% decrease. Last month, the PPI reading declined 0.1%.

As far as the Swiss Franc is concerned, the Bank of America is of the opinion that the currency is fast losing its appeal as a safe haven currency. The argument of BoA stems from the fact that the trade-weighted index of Swiss Franc had moved within a range of 0.75% in March. In fact, the implied volatility of the EUR/CHF pair in the past month was only about 5.2%. This compares with an implied volatility of 10% and 7.5% seen during Brexit referendum and the US elections. Analysts attribute the intervention policy of the Swiss National Bank as the main reason for the lack of volatility and upward movement.

Thus, on the basis of facts presented herewith, we forecast the GBP/CHF pair to remain bullish in the short-term.

The GBP/CHF pair has made a bullish triangle formation, as shown in the image below. The increasing momentum is also confirmed by the positive reading of the MACD histogram. So, the current uptrend is likely to continue.

A currency trader can benefit from the forecast by opening a long position near 1.2580 in the GBP/CHF pair. To cut unwanted losses, a stop loss order can be placed below 1.2460. An order to book profit can be placed near 1.2800.

To establish the equivalent of a long position in the currency market, a binary trader can purchase a call option from a broker of choice. The recommended expiry period is one week. It would also be advantageous to the trader, if the investment is made when the cross trades near 1.2580.

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