Risk event for the week starting 30 May: EUR/CHF

(Video Transcript)

Inflation

One of the big features at the moment is economist's persistence and expectations on inflation.

Now, the idea is, of course, that we've seen a number of economies produce inflation data, which has shown that it's becoming a really big issue. Next week, it's the turn of the Swiss economy.

EUR/CHF

Let's turn now to take a look at a Risk Event around this and join Justin McQueen from DailyFX.

Justin, it's good to be able to catch up with you again and I know that this inflation data next week could be key. What are your thoughts and what you do in terms of formulating a Risk Event and a tradeable opportunity around this?

Good morning, Jeremy. I think really looking towards the Swiss National Bank (SNB) for next week and we have the all important Swiss inflation data, which has now stepped up in importance after a recent commentary from the SNB President Jordan, who stated that the bank would be ready to act to the threat of inflation if that does materialise. And also the risk of second round effects. So it seems like the SNB, as one of the central banks, are also taking a bit of a hawkish turn.

And I think this is quite important from the SNB point of view, given the fact that they've been dovish for so long. They've had negative rates for many years now. And so I think it's something that has been somewhat under the radar and I don't really think many people are positioned for a hawkish pivot from the SNB. So I do think that with regards to the Swiss franc, over the next couple of weeks to months, we could start to see quite a bit of strength come into the Swiss franc should we see inflation data continue to pick up and obviously move further away from the SNB's 2% target.

And that's why the inflation data will be very key next week. Of course, we've seen that shift from the European Central Bank (ECB), so I don't think the SNB will be too far behind a shift as well, given that they like to sometimes move somewhat in tandem with the ECB, maybe somewhat delayed from ECB policy action, but the fact that they've started to signal that they would be prepared to raise interest rates.

We also saw from the board member earlier this week that the central bank wouldn't hesitate to tighten monetary policy if inflation does not settle below the 2% target. And therefore, for next week's Risk Event, the Swiss inflation data will be important.

What we're looking out for, I do think that with regards to the Swiss franc, you can probably expect to see some strength across the board. But I'm looking at EUR/CHF, which is a pretty interesting trade. Of course, we do have that hawkish side on the euro front with the ECB and some officials not ruling out a 50-basis point move. I do think that the 50-basis point move is probably a bit too aggressive to start off with. I think they do go ahead with a 25-basis point rate hike in July and also in September as well.

We also have to take into account that a lot has been priced in, in terms of money markets for the ECB. So it starts to look somewhat aggressive. And of course, if they do disappoint, with data expected to soften towards the back end of the year, then that does provide an opportunity for the EUR/CHF to move lower.

I think really the key resistance area is that 200-week moving average, which has been key for many months now. And I would ultimately say that I would probably reassess the view of looking for lower EUR/CHF if we were to close above 1.0520.

For me, I expect EUR/CHF to continue to trend lower, particularly after those hawkish comments from SNB's Jordan. And perhaps maybe we might even see a return to parity on EUR/CHF.

Big call. Justin, thanks very much indeed.

Justin McQueen from DailyFX, taking a look ahead to a trade around next week's CPI data in the Swiss economy.