- GBP/CHF supported near 1.2700 & looking to crack 1.28

- May be on cusp of breaking into a 1.28-to-1.3000 range

- But USD direction & European economic recovery is key

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GBP/CHF reference rates at publication:Spot: 1.2775Bank transfers (indicative guide): 1.2328-1.2417Money transfer specialist rates (indicative): 1.2660-1.2686More information on securing specialist rates, hereSet up an exchange rate alert, hereThe Pound-to-Swiss Franc exchange rate was testing three-month highs early in the new week, a break above which could lead Sterling into a 1.28-to-1.3091 trading range, although economic developments and the trajectory of the U.S. Dollar will have the final say.

Sterling briefly tested the 1.28 round number against the Swiss Franc on Tuesday, a level it has closed above only twice in the last three months before being pulled lower on each occasion by a strengthening Swiss Franc.

Those two daily closes above 1.28 came in the wake of the latest Federal Reserve (Fed) interest rate decision that partially reversed the second quarter fall of the main Swiss exchange rate USD/CHF, which is one of two integral influences on GBP/CHF.

The Pound-to-Franc rate would rise above 1.28 over the coming weeks if the greenback continues to strengthen against low interest rate currencies, like the Franc, in the way it has done since the Fed indicated last month that it could potentially raise rates sooner than previous guidance had suggested.

“We do not expect the SNB to raise rates for many years, and after the ECB,” says David Oxley, a senior Europe economist and head of the Nordic and Swiss service at independent consultancy Capital Economics.

Switzerland has the lowest interest rate in the world and June’s forecast from the Swiss National Bank (SNB) suggested the country’s annual inflation rate would sit at just 0.6% at the other end of its forecast period in 2023, which effectively rules out an increase in interest rates in that time.

Above: Pound-to-Swiss Franc rate at daily intervals with Fibonacci retracements of Jan 18 low to March 18 high.

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This could be why the main Swiss exchange rate USD/CHF, which is a direct determinant of GBP/CHF along with the main Sterling pair GBP/USD, has begun to reverse the strengthening it had previously seen throughout the second quarter.

“The USD was bought for most of the past week with real money investors driving most of the latest development, at least when it comes to our data,” says Valentin Marinov, head of FX strategy at Credit Agricole CIB. “As such, last week’s mixed US labour data failed to fully dampen demand for the USD, which is also reflected in our positioning based model suggesting that USD/CHF should still be bought.”

Switzerland’s low interest rates mean the Franc is a popular ‘funding currency’ for investors, which means it is often borrowed in order to be sold in exchange for others which investors and traders think might rise in value.

Only in order for investors to swap Francs into other currencies they must first buy the Dollar, for reasons relating to the mechanics of the currency market, and then sell it in exchange for the third currency in a process that has the effect of pushing up USD/CHF.

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“The more uncertain tactical Dollar outlook should lead investors to diversify their funding currencies in pro-cyclical trades. CHF should be a prime candidate, as underscored by this week’s release from the SNB that revealed it was mostly on the sidelines for the Q1 selloff (buying just CHF 0.3bn of foreign currency in the quarter,” says Zach Pandl, co-head of global foreign exchange strategy at Goldman Sach in a recent note.

“The main risk to this view is that the Delta variant further delays the economic reopening,” Pandl adds.

Pandl and the Goldman Sachs team prefer to buy EUR/CHF, a trading idea that would also have at least a temporary upward influence on USD/CHF as this also would involve a behind the screens process whereby Francs are sold for Dollars and then Dollars for Euros.

Switzerland’s low interest rates and a tentative revival of the U.S. Dollar are one potential reason for why the USD/CHF exchange rose by nearly 4% in June and appeared last week to be attempting to overcome 0.9262 and the 61.8% Fibonacci retracement of its second quarter fall.

Above: USD/CHF shown at daily intervals with Fibonacci retracements of Q2 reversal, alongside GBP/CHF.

“We expect the CHF and EUR to take the brunt of the USD strength,” says Joseph Capurso, a strategist at Commonwealth Bank of Australia.

The Pound-to-Franc rate would rise to 1.2838 if USD/CHF rises back to last week’s high around 0.9262, even if the main Sterling exchange rate GBP/USD went nowhere from Tuesday’s 1.3860 level.

GBP/CHF would rise further and as far as 1.2970 if USD/CHF rises further to 0.9358, which coincides with the 78.6% Fibonacci retracement of the latter’s second quarter strengthening trend.

The Pound-to-Franc rate’s gains would be larger and could potentially take the exchange rate above 1.30 if, over the coming weeks, the main Sterling exchange rate GBP/USD also rises.

GBP/CHF would rise to 1.3091 if as USD/CHF rises to 0.9358, the main Sterling exchange rate rises to 1.3992, which would be a 50% reversal of June’s Dollar-induced losses.

However, and almost needless to say, GBP/CHF would remain below 1.28 and potentially also fall alongside GBP/USD if the main Sterling exchange rate declines in the weeks ahead.

“The negative outlook remains entrenched while capped by the 1.4018 near term pivot,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, who has a bullish outlook for GBP/CHF.

Above: GBP/USD shown at daily intervals alongside USD/CHF.