Sterling holds ground amid stabilizing U.K. debt market
USD/CHF is tracking U.S. yields with a tight correlation. Inflation data will show whether Tuesday’s rebound stalls or the July lows come back into play.
- USD/CHF Tuesday rebound likely driven by position squaring.
- U.S. CPI and PPI to shape Fed rate expectations.
- Pair tightly correlated with U.S. yields in recent weeks.
- Technical bias still leans bearish under key moving averages.
A retest of the July swing low in USD/CHF may have to wait with the pair rebounding Tuesday on the back of likely position squaring ahead of key U.S. inflation data. With a strong correlation to movements in U.S. interest rates over the past fortnight, the detail will likely determine whether the downside break of the bear pennant the pair had been trading in earlier this week plays out in full.
How Fast, How Large?
With a massive 911,000 downward revision to U.S. nonfarm payrolls growth reported in the year to March, coming on top of an 818,000 reduction in the prior 12-month period, the ducks are lining up for the Fed to resume its easing cycle for the first time since December 2024. The only real question is how fast and how large the moves will be.
U.S. PPI and CPI released over the next two days will go a long way to answering that question, likely determining whether the Fed resumes with a 25 or 50-point move in September, or no change should the data prove too hot to handle.
It will also be important information for USD/CHF traders considering it has logged correlation coefficient scores of 0.8 or higher with U.S. Treasury yields out to 10 years over the past fortnight. Should that persist, whichever direction yields move, USD/CHF may well follow.
Source: TradingView
Event Risk Looms Large
I won’t go over old ground in full with a preview of what to look out for, other than to point you towards analysis written earlier this week explaining why services prices will likely be the chief determinant of how the Fed proceeds. Other than the inflation reports, the U.S. calendar above highlights other events that could influence U.S. interest rate markets.
The 10-year and 30-year Treasury auctions are the ones to watch, although if the 3-year note auction on Tuesday was anything to go by, they may pass with little impact. Swiss National Bank president Martin Schlegel is also scheduled to speak on Wednesday, although in comments earlier this week he flagged that the bar for negative interest rates in Switzerland remains high.
Unless he performs an unlikely dovish pivot only days later, it doesn’t screen as a major risk event.
USD/CHF Downside Break Stalls
Source: TradingView
The downside break in USD/CHF has not been able to extend to retest the July lows as convention would suggest, with the pair rebounding from minor support at .7920 on Tuesday, likely assisted by position squaring. However, having pushed back towards the intersection of former uptrend support and horizontal resistance at .7986, it has created an opportunity to assess fresh setups depending on how price action evolves around the inflation reports.
With RSI (14) trending lower and below 50, a mildly bearish bias remains favoured, especially with MACD bolstering the momentum signal having crossed the signal line from above before slipping into negative territory. As such, short setups come across as having a better chance of success, especially given the prevailing trend with the price beneath both the 50 and 200-day moving averages.
One short setup to consider would be to sell beneath .7986 with a stop above the level, targeting .7920 initially with .7873 another option below. However, if Tuesday’s rebound extends beyond .7986, the setup could be flipped with longs established above the level with a stop below. The 50-day moving average provides a target for traders who prefer shorter timeframes, with downtrend resistance around .8075 or horizontal resistance at .8150 other options after that.