- The possibility of a rate cut planned by the ECB on June 6th is likely fully priced into the market.
- Forward guidance from ECB officials on the timing of further rate cuts is unclear, and the current consensus forecast for a slowing trend in euro zone core inflation may have plateaued in May.
- These factors are likely to support a further widening of the premium seen in the spread between eurozone and Swiss two-year government bond yields.
- EUR/CHF eyes key mid-term support at 0.9830
This is a follow-up analysis to our previous report. “EUR/CHF technicals: Bullish exhaustion detected after 2-month rally” Published on April 17, 2024. Click here for summary.
Since our last analysis, the EUR/CHF cross pair has seen a slight corrective decline and almost reached the support zone at 0.9540/9470, as highlighted. It recorded an intraday low of 0.9565 on April 19th and then showed a bullish reversal, rising 3.8% (365 pips) in the following four weeks to reach a current 52-week high of 0.9930 at the time of writing.
The Swiss franc (CHF) fell against other G10 currencies excluding the Japanese yen (JPY) after the Swiss National Bank (SNB) unexpectedly cut its key policy interest rate by 25 basis points (bps) to 1.50% on March 21, the first cut in nine years.
The Swiss Franc (CHF) continues to slowly collapse
Figure 1: CHF 3-Month Rolling Performance vs. G10 Currencies as of May 27, 2024 (Source: TradingView, click to enlarge chart)
Based on three-month relative performance as of May 27th, CHF had fallen 3.9% against the EUR, making it the third weakest CHF cross pair after CHF/GBP (-4.3%) and CHF/AUD (-4.8%) (see Chart 1).
Eurozone two-year government bond yields are still trading higher than Swiss government bonds.
The European Central Bank (ECB) had kept interest rates unchanged for five consecutive months since its last monetary policy meeting in April, but instructed market participants that it would implement the euro zone's first interest rate cut of 25 basis points at its meeting on June 6.
The possibility of the ECB's first rate cut has been so well “heralded” that it is likely almost fully priced in, but the timing of the next one is unclear as officials have mixed views on euro zone inflation and economic growth trends.
Among less dovish officials, ECB chief economist Philip Lane said in an interview with the Financial Times published on Monday, May 27, that the ECB needs to keep policy in “tightening territory” through 2024, despite planning to cut interest rates in June.
Moreover, Rehn's concerns appear to be reflected in the consensus forecast among private economists for euro zone core inflation (excluding food and energy) for May, due to be released this Friday, May 31. The forecast calls for an unchanged increase of 2.7% year-on-year, which, if correct, would mark the second consecutive month of such an increase since April and suggest a weakening trend in euro zone inflation decelerating after eight consecutive months of slowing inflation growth.
Uncertain forward guidance from ECB officials on the timing of a second rate cut, combined with expectations that the ongoing slowdown in euro zone core inflation may plateau in May, are likely supporting the current high yield premium that shorter-term two-year euro zone government bonds currently command over Swiss government bonds of the same maturity.
The premium between Eurozone and Swiss 2-year government bond yields has been widening since the start of the year, most recently exhibiting a medium-term bullish breakout on March 21st, rising 18 basis points to 1.99% at the time of writing (see Figure 2).
EUR/CHF eyes medium-term key support at 0.9830
Figure 2: Eurozone/Swiss 2-Year Government Bond Yield Spread and EUR/CHF Medium-Term Trend as of May 27, 2024 (Source: TradingView, click to enlarge chart)
Overall, the widening premium seen in the spread between Eurozone and Swiss 2-year government bond yields supports the medium-term uptrend phase of the EUR/CHF cross currency pair, which has continued since its low of 0.9254 on December 29, 2023.
If the key medium-term support at 0.9830 holds, EUR/CHF could again experience an impulsive upward streak towards the next medium-term resistance zone at 1.0040/1.1000 (nearly converging with the long-term descending trend line from the April 2018 highs).
Conversely, a drop below 0.9830 will negate the bullish trend and expose the next medium term support at 0.9680 and 0.9575 (the crucial 200-day moving average).
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