EUR/CHF: All is not lost…yet

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Two weeks ago, EUR/CHF finally regained the 1.10 level for the first time since “Black Thursday,” when the Swiss National Bank unexpectedly dropped its floor on the pair. Unfortunately for EUR/CHF bulls though, it’s starting to look like at least a portion of those gains were illusionary.

Since the failed breakout, EUR/CHF consolidated below the 1.10 level throughout last week before turning definitively lower this week. As of writing, the unit is now trading beneath its previously-strong bullish trend line. In general, a broken trend line signals a change in trend, though not necessarily an immediate reversal of the previous trend; for example, EUR/CHF may simply start to “trend” sideways around 1.0800 from here, but there is no denying that the chart is less supportive than it was at this time last week.

Meanwhile, the secondary indicators have also deteriorated notably, with the MACD turning down to cross back below its signal line and the RSI indicator breaking its own bullish trend line. It’s worth noting that, even after the breakdown, the RSI is still in uptrend territory above 40, so bulls have reason to maintain some optimism, at least for now.

That said, we’re taking a “prove it” approach toward the recent EUR/CHF strength: as long as the unit remains below psychologically-significant resistance at 1.10, the level where it saw the false breakout earlier this month, more downside is favored in the short-term. From here, the next logical support levels to watch will be the 38.2% Fibonacci retracement of the Q3 rally at 1.0765 and the 50% retracement at 1.0680. Only a confirmed close back above 1.10 would signal that the rally has resumed and that a bearish bias is no longer appropriate.

Finally, in terms of fundamental catalysts, traders will closely watch tomorrow’s testimony by ECB President Draghi to the European Parliament. This quarterly presentation is akin to the semiannual Humphrey-Hawkins testimony by the US Federal Reserve Chair and could feature pointed questions about the ECB’s ongoing QE program and monetary policy more broadly.

eurchf9-22-2015 3-08-32 PMSource: City Index

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