EURCHF stirring and reversing

In recent months we have published a handful of notes and videos on the Euro currency, against the U.S. dollar and on some cross rates, such as EURCAD and EURAUD. In all, we have been advocates of Euro strength.

While the jury is still out on EURCAD and EURAUD, this week the EURUSD launched a rebound from its 20 year, long term trendline support and specifically from the 1.0770/60 region, that halted declines in April and February of this year.

One of the key catalysts behind this week’s EURUSD’s rally was a joint press conference where German Chancellor Angela Merkel and French President Emmanuel Macron proposed a €500bn Recovery fund to support the regions worst hit by COVID-19.

The proposal outlines that funds raised via the market will be distributed to member states via grants. The member states would not be required to repay the grants. Instead, the grants would be repaid via revenues of the EU budget.

This has been met with opposition from member states including Austria, Denmark, the Netherlands, and Switzerland who prefer loans as opposed to grants. However, at the core, the proposal is viewed as a first step towards fiscal union - the lack of which has been a key problem weighing on the Euro since inception.

In terms of how FX markets might respond should the Franco-German proposal gain traction, moves this week in EURUSD and EURCHF provide an insight.

As can be viewed on the chart below EURCHF has been well supported ahead of 1.0500 in recent months and there are signs of bullish divergence via the RSI indicator. Additionally, the rally on Monday above the April 1.0612 high, ends the recent pattern of lower highs and lower lows and is a preliminary sign that a recovery is underway.

Further confirmation would be a break and close above resistance 1.0655/70 area that would then allow a stronger recovery towards the highs of late 2019, 1.1035/55 area. Keeping in mind, if EURCHF was to break/close below the 1.0500 support zone, it would be negate the prospects for a recovery.

Source Tradingview. The figures stated areas of the 20th of May 2020. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation