USDCHF Testing Bullish Trend Line after ECI Bombshell

If you have no clue what the “ECI” in the title is, you’re hardly alone.

The Employment Cost Index (ECI) is a quarterly measure of the amount that companies and the government are paying their employees. Usually, this second-tier report barely even garners even a passing mention in the business news, but with the Fed’s recent shift to focusing on inflation as the last missing piece in the rate hike puzzle, some traders have started to pay attention to it.

Unfortunately, the increased attention came at a terrible time for the indicator, which printed at just 0.2% q/q, missing the 0.6% growth that economists had been expecting. Incredibly, this is the lowest quarterly reading in the ECI since records began in 1982! With the annual rate of employment costs rising at just 2.0% annually (and falling), this morning’s report was a definite setback for traders anticipating that the Fed would raise interest rates in September, and the US dollar has predictably turned sharply lower as a result.

Technical View: USDCHF

We’ve been paying particularly close attention to USDCHF of late, as the pair rallied into Bearish Gartley pattern completion last week, prompting a 100-pip drop, before last week’s historically low unemployment claims drove the unit up through that resistance level. Yesterday, the rally stalled out against secondary pattern completion (marked by the 61.8% Fibonacci retracement of XA, the 161.8% extension of BC and the 127.2% ABCD pattern) around .9725. This reversal was accompanied by a clear bearish divergence in the Slow Stochastics indicator, suggesting that underlying buying momentum was waning, even though exchange rate itself edged to a new high.

For USDCHF bulls, today’s shockingly low ECI reading may serve as the proverbial nail in the coffin, at least in the short-term. The pair is now testing 5-week bullish trend line support around .9575, but if that level gives way, a deeper retracement toward .9500 or .9400 could be in play next week. Meanwhile, only a break and close above the top of the resistance zone at .9800 would turn the medium-term bias back to the topside.

Source: City Index