EUR/CHF Technical: Bullish exhaustion condition detected after 2-month of rallies

• A bolder dovish ECB increases the likelihood of a yield premium shrinkage of Eurozone sovereign bonds over Switzerland sovereign bonds.
• The recent 2-month of rallies seen in the EUR/CHF have been overstretched with bearish momentum conditions flashed out.
• EUR/CHF is at risk of shaping a short-term mean reversion decline within a medium-term uptrend phase.
• Watch the 0.9755 key short-term pivotal resistance on the EUR/CHF.

The recent two months of Euro strength against the CHF has led to a stellar gain of +540 pips (+5.8%) in the EUR/CHF cross pair from a low of 0.9306 on 31 January 2024 to a recent high of 0.9849 printed on 4 April 2024.

The current bout of outperformance of the EUR against the CHF  has been reinforced by the CHF side of the equation as the Swiss National Bank (SNB) surprised market participants on 21 March with a rate cut of 25 basis points (bps) to bring its key policy rate down to 1.5%, its first cut in nine years, and ahead of the US Federal Reserve, Bank of England (BoE), and European Central Bank (ECB).

A bolder dovish ECB sucks out some of the bullish pressure in the EUR/CHF cross rate

Relativity is a key mechanic in the foreign exchange market as we need to look at its movements from a relative rather than an absolute basis. In the recently concluded ECB monetary policy meeting last Thursday, 11 April, ECB President Lagarde expressed a high degree of confidence that the ECB might enact its first interest rate cut this coming June due to the continuation of the inflationary deceleration trend seen in the Eurozone.

Hence, the shorter-term yield premium of Eurozone sovereign bonds over Switzerland sovereign bonds is likely to shrink which in turn increases the odds of a mean reversion decline scenario to occur in the EUR/CHF at least on a short-term basis.

Bearish momentum condition supports a mean reversion decline scenario

Fig 1: EUR/CHF medium-term trend as of 17 Apr 2024 (Source: TradingView, click to enlarge chart)

Fig 2: EUR/CHF short-term trend as of 17 Apr 2024 (Source: TradingView, click to enlarge chart)

In the lens of technical analysis, price actions of highly liquid tradable financial instruments do not move in a vertical direction but oscillate around a higher time frame trending phase.

The medium-term (multi-week) trend phase of the EUR/CHF is now likely in a bullish uptrending phase as price actions have staged a bullish breakout from its former medium-term descending trendline resistance from the 2 June 2023 swing high and the 50-day moving average as well as the 200-day moving average (see Fig 1).

However, the daily RSI momentum indicator flashed out a recent bearish divergence condition on 9 April and broke below a key parallel ascending support on 12 April. So far it has not reached its oversold condition which suggests that bearish momentum is still intact and might add further downside pressure on the EUR/CHF cross pair.

In addition, the EUR/CHF has also traded below the 20-day moving average since last Friday, 12 April which reinforces the potential short-term mean reversion decline scenario that might seek a retest on its 50-day and 200-day moving averages (see Fig 2).

Watch the 0.9755 key short-term pivotal resistance with the next intermediate supports coming in at 0.9630 and 0.9540/9470.

On the flip side, a clearance above 0.9755 invalidates the bearish tone for a squeeze-up to expose the next intermediate resistance at 0.9840 in the first step.