The EUR/CHF exchange rate rose as the recent euro crash stalled. After bottoming at 0.9205 in December, the pair jumped to a high of 0.9400 after a series of strong inflation numbers from key European countries. So, will the EUR to CHF rise after forming a bullish divergence pattern?
European inflation is rising
There are signs that European inflation is ticking up, complicating the dovish tone set by the Europan Central Bank (ECB). Last week’s data showed that the Spanish consumer price index rose to 2.8% in December, higher than the median estimate of 2.6% and November’s 2.6%.
Another report released on Monday revealed that the same trend is happening in Germany. The headline Consumer Price Index rose from 2.2% in November to 2.6% in December, also higher than the median estimate of 2.4%. The closely watched harmonised inflation figure rose to 2.9%.
Therefore, there is a likelihood that the bloc’s flash inflation data released on Tuesday will show that inflation continued rising in December. Economists expect the numbers to reveal that the headline CPI rose from 2.2% to 2.4%.
These numbers mean that the ECB may embrace a gradual pace of interest rate cuts this year. It slashed rates by 1% in 2024 and hinted that more were coming.
The risk the ECB is facing is that the bloc may be moving into stagflation, a period characterized by slow economic growth and high inflation. This is one of the most difficult periods in monetary policy since a rate cut to boost economic growth may lead to high inflation. A hike to slow inflation may also lead to slow GDP growth.
The ECB has signaled that it will deliver more rate cuts this year as the economy goes through a major slowdown. As such, the recent economic numbers mean that officials will not cut as quickly as expected.
Swiss National Bank cuts
The weakness of the Swiss franc is good news for the Swiss National Bank (SNB), which has been more dovish lately. In December, it delivered a 0.50% interest rate cut, the biggest one in over a decade.
The bank’s big cut came as the Swiss inflation continued falling in November and as the franc jumped. Unlike many central banks, the SNB prefers a weaker franc because the country is a big exporter and a weaker currency makes its goods cheaper in foreign markets.
The ECB has also left the door open for more cuts this year, a move that would lower interest rates to the negative zone. Negative rates would make the Swiss franc less attractive and encourage asset managers to borrow money to invest abroad.
EUR/CHF technical analysis
The daily chart shows that the EUR to CHF exchange rate bottomed at 0.9205 in 2024, forming a double-bottom chart pattern. A double bottom is a highly popular bullish chart pattern as it signals a reversal.
It has moved above the descending trendline, connecting the highest swings since August of last year. Also, it has jumped above the 50-day and 25-day Exponential Moving Averages (EMA).
Most importantly, the pair has formed a bullish divergence chart pattern as the Relative Strength Index (RSI) and the MACD have continued to rise gradually. It formed an inverse head and shoulders chart pattern.
Therefore, the pair will likely continue rising as buyers target the 50% Fibonacci Retracement point at 0.9570, up by almost 2% from the current level. Conversely, a drop below the blue trendline will point to more franc strength.
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