The Euro was pushed lower against its rivals when Mario Draghi, the President of the ECB, announced an extension to the quantitative easing program in December 2016. One of the currencies which immediately strengthened following the announcement was the Swiss Franc. The Euro fell further when the US Fed Chair Janet Yellen delivered a 25 basis point rate hike. The FOMC statement outlining the possibility of three rate hikes in 2017 also fuelled the selloff of the Eurodollar. Ultimately, the EURCHF pair hit a low of about 1.0680 in the final week of December 2016. However, we believe that the time is ripe for a rally in the EURCHF pair due to the reasons mentioned below.
The market hammered the Euro for extending the QE program. However, it should be noted that the quantum of purchase has been brought down to Euro 60 billion per month from April onwards. The ECB is currently purchasing 80 billion worth of bonds per month. This reduction in the size of purchase indicates ECB’s optimism about the economic recovery in Europe.
There are also firm indications of recovery in the manufacturing sector. The EU automakers reported record sales in December and finished the third consecutive year of sales growth above analysts’ estimates. As many as 14.6 million new vehicles, up 6.8% y-o-y and double the Wall Street’s estimates, were registered in 2016. The ECB is of the opinion that the EU economy is recovering at a moderate pace and the inflation would rise significantly in the coming months.
In Switzerland, the Swiss National Bank continues to take whatever possible action it can, including the implementation of negative interest rates and market intervention, to weaken the Swiss Franc. The SNB sees the Swiss Franc as considerably overvalued and believes that it would hamper the competitiveness of the Swiss industry. So, the SNB is proactively engaged in turning its currency less attractive for investors. Thus, fundamentally, we can expect the EURCHF pair to turn bullish in the short-term.
The EURCHF chart indicates strong support at 1.0700. The stochastic oscillator has already emerged out of the bearish zone. Thus, we can anticipate an uptrend in the EURCHF pair.
A Forex trader should preferably go long in the EURCHF pair near 1.0700. A stop-loss order can be placed 100 pips below the entry price. The long position can be closed for profit at 1.0820.
Purchasing a call option would enable a trader to profit from the probable uptrend of the EURCHF pair. The high or above contract, which is the equivalent of a call option, can be purchased only if the cross trades below 1.0730. In order to increase the probability of success in the suggested trade, an expiry time of one week should be allowed for the contract.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
