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GBPCHF Analysis (May, 2022) Monetary Levers Initiated

If you live within the UK within the past couple months you've likely noticed a sharp rise in prices from food to energy. These high prices are starting to show in the lagging data with the growth rates shrinking by 0.1%. Although a small bearish move could this be a start to a potentially recessionary pressure...

The Bank of England has already started to react to the inflationary pressures across the UK by increase interest rates to 1%, the highest it's been since 2009.

This monetary lever is used to deter lending and creating a shortage in money supply which should reduce demand on an aggregate level. Following the rules of supply and demand, as demand falls prices should follow which is needed to stop prices getting out of control.

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Taking into account the central authorities reaction to rising inflation we can see that there's already a money supply constraint going on. This type of reaction is seen as a deflationary reaction to slow down the economy from overheating.

In this case we can assume the currency GBP could appreciate as supply of money falls the price rises.

Overall the fundamental indicators have started to swing towards a bullish movement. GBP started off strong in the months of April but now we've moved into March it flipped from being bearish to potentially bullish again.

On the flip side the CHF has seen a steep decline and thus creating a GBPCHF bullish fundamental view.

Macro Currency Strength Meter

The Macro Currency Strength Meter is one of our main fundamental indicators we use to gauge the fundamental strength of a currency. By gathering and analysing the scheduled economic reports we can determine on a week to week basis fundamental trends in data.

What we're seeing is that over the past 2 weeks of May, the GBP fundamental data fell bearish but this week we saw it make a recovery suggesting the start of a bullish run for GBP data.

On the flip side CHF has maintained a bearish stance.

GDP Differentials

The GDP differentials were one of the long term fundamental indicators. Both the UK and Switzerland growth rates look to be growing at a much slower rate following the recovery from the pandemic.

However, at a high level the UK looks to be growing still at a faster pace than CHF which creates a bullish view for GBPCHF.

Trade Analysis (Imports/Exports)

BP is a British Petroleum company, a common petrol stations (gas station) in the UK.

The massive price surge in oil has seen petroleum companies across the world see increased profits and revenue as they're now able to charge higher prices.

On top of this, earlier within the year oil prices saw a huge slump where suppliers could have bought up barrels at a much cheaper rate.

What we're seeing is a strong positive correlation between the two prices, as BP prices rise so does GBPCHF, in this case we're seeing the trade analysis support the bullish fundamental bias from -

Gold is actually a fairly big commodity traded within the UK as many parties hold their gold in UK vaults. What we can gather from the correlation on analysis over the past year or so is that as the price of gold rises we see GBPCHF fall in price and vice versa.

The main points of interest have been the double top bearish price pattern on gold form earlier last month with GBPCHF now showing a triple bottom / head and shoulders which suggests GBPCHF may be in for a bullish movement soon.

Overall, the trade analysis following the bullish trends from the fundamental indicators.

Nestle is a huge company based in Switzerland who as many of you supply major retailers and consumers with food and drink products. We found that this company had a negative correlation against GBPCHF over the past year and Nestle starting to show formations of a double top.

In this case if this trend continues and nestle sees bearish movement then GBPCHF will have a higher confidence in the bullish movement.

Interest Rate Differentials

The interest rate differentials are a very strong fundamental indicator which suggests that overall the GBP is a much more valuable currency as investors can earn interest on their investments held in the GBP Currency.

We can see the Bank of England has reacted to the inflationary conditions in the UK by increasing interest rates, causing the differentials to spike in favour of GBP.

Hedge Fund Positioning

The Hedge fund positions are identified using the COT commitment of traders report. What the lines show is the open interest for the currencies.

That being said the solid blue line shows that hedge funds have been buying the GBP and selling the CHF.

Showing that the sentiment of the market is bullish on GBPCHF.

Overall, majority of the signs are aligning to being confident of a bullish move for GBPCHF.

Price Analysis

The price trends have been fairly bearish the past 6 months however prices are now reaching areas of support where buyers have come into the markets.

What we can suggest is any bullish price trends or patterns here could be seen as higher confidence due to the fundamentals being on their side.

Keep an eye out as there's already potentially a double bottom forming.

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