USD/CHF analysis: inverse head and shoulders pattern forms

on Jul 10, 2024
  • The USD/CHF exchange rate has moved sideways this month.
  • The US will publish the closely-watched consumer inflation data on Thursday.
  • Jerome Powell has said that the Fed is prepared to cut interest rates.

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The USD/CHF exchange rate has remained in a tight range in the past few weeks as investors assess the next actions by the Federal Reserve and the Swiss National Bank (SNB). The pair was trading at 0.8975 on Wednesday, a few points below the year-to-date high of 0.9225. 

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Federal Reserve’s next actions

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The USD/CHF pair has pulled back as investors reflect on the relatively weak economic numbers from the US and its implications on the Federal Reserve.

In a report, the Institute of Supply Management (ISM) said that the manufacturing PMI dropped to the contraction zone of 48.2 in June. 

Another report revealed that the non-manufacturing PMI fell to 49 during the month. It was the first time in months that the sector moved below the contraction zone of 50. A PMI reading of less than 50 is usually a sign that a sector is contracting. 

Meanwhile, another data by the Bureau of Labor Statistics (BLS) showed that the economy added over 202k jobs in June after adding 218k in the previous month.

While the headline figure was good, the unemployment rate rose to 4.1% in June while wage growth contracted during the month. 

US inflation data ahead

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These numbers came a few weeks after the US released encouraging inflation data. The headline Consumer Price Index (CPI) dropped to 3.3% while the core CPI moved to 3.4%. 

Looking ahead, the next key important USD/CHF will be the upcoming US inflation data set for Thursday. Analysts expect the numbers to reveal that the headline Consumer Price Index (CPI) remained at 0.2% (MoM) and 3.4% (YoY) in June. 

They also expect the data to reveal that the headline CPI rose from 0.0% in May to 0.1% in June and dropped from 3.3% in May to 3.1% in June. If these numbers are correct, it will be a positive thing for the Fed.

In a statement on Tuesday, Jerome Powell noted that the Fed welcomed these inflation numbers but warned that it was too early to predict when the cuts will happen. 

Analysts expect the Fed could signal that it will start cutting rates in September. It will continue watching these numbers and signal whether it will cut rates at its Jackson Hole Symposium in Wyoming. In a statement, analysts at ING said:

“Our position is that the Fed doesn’t want to cause a recession if they can avoid it and if the data allows we expect the Federal Reserve to start moving monetary policy from “restrictive” territory to “slightly less” restrictive policy from September.”

At the same time, the Swiss National Bank (SNB) is expected to continue interest rates. It has already started cutting interest rates, moving from the year-to-date high of 1.75% to the current 1.25%. 

The spread between the Fed and SNB interest rates will remain being wide, creating a good carry trade opportunity. Carry trade is where investors borrow a low-yielding currency like the Swiss franc to invest in a higher-yielding one.

USD/CHF technical analysis

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USD/CHF chart by TradingView

The daily chart shows that the USD to CHF exchange rate has remained in a tight range in the past few days. It has remained at 0.900, where it has been stuck at 50-day and 100-day Exponential Moving Averages (EMA).

The pair has remained at the 50% Fibonacci Retracement level. It has also formed an inverse head and shoulders pattern. Therefore, there is a likelihood that the pair will have a bullish breakout as buyers target the key resistance point at 0.9220, the neckline of the inverse H&S pattern. 

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