The EURCHF is one of the most interesting currency pairs part of the FX dashboard. Ever since the Swiss National Bank (SNB) dropped the exchange rate floor from the 1.20 level in January 2015, the pair gained worldwide fame.
Even today, more than five years after the event, it acts as a barometer for Euro’s strength or weakness, not to mention its implications for the USDCHF rate. Recently, the cross attempts a break higher from the years-long trend. It seems to have bottomed at 1.05, and it even broke the bearish trendline that marked the previous trend.
Is this breakout real, or will the market reverse? My take is that the EURCHF did break higher, but it needs to make another correction towards the 1.06 level. Here is why.
One of the reasons why the SNB dropped the EURCHF 1.20 floor was the ECB decision to move the deposit facility below zero. Forced with a weaker and weaker Euro, the SNB could not take the losses from the fixed exchange rate anymore. Anyway, it lost tens of billions of CHF in the years it protected the exchange rate.
Somehow a similar situation we should expect currently. The ECB is forced to act should core inflation drop even more than the current 0.4% level. If that is the case, the EURCHF is vulnerable to more downside, albeit it is not mandatory to make a new low.
Any technical trader cannot ignore the trendline’s break. Considering that this is the weekly timeframe, it is even more important.
But as long as the EURCHF cross hesitates at resistance, the price action is subject to a correction. Keep in mind that this is not a currency pair that travels a lot lately, so any trade here should have tight stop-loss and take-profit levels.
From an Elliott Waves point of view, it looks like the EURCHF is in a second wave – a correction before the third wave of an impulsive move. To trade it, bears should enter at the market with a stop-loss at 1.0860 and a target below 1.0650.
