The article was written exclusively for Investing.com
The might not be everyone’s cup of tea, but THIS cup and handle formation certainly makes it a market for bullish speculators to watch.
The has been pushing higher across the board as optimism rises over the prospects of a breakthrough in the stalemate as Brexit talks enter a crucial stage. Meanwhile, the has lost some of its haven appeal over the past few weeks thanks to optimism on potential COVID-19 vaccines and investors’ hopes for more normal times in 2021. As a result, the GBP/CHF has been printing bullish price action, and a big breakout towards 1.25 could be on the cards soon.
Indeed, the technical outlook on this pair is starting to look quite promising for the bulls. Since forming a bottom in March along with other risk-sensitive assets, the GBP/CHF has been stuck inside a large consolidation zone, unable yet to follow the equity markets higher. But that could change as the bullish pressure builds below the key 1.2200 resistance level with rates forming a bullish-looking “cup and handle” formation.
The last two tests of this 1.2200 resistance level—on Nov. 11 and 24—led to progressively shallower sell-offs, suggesting the downward pressure is waning. If this was still a strong resistance level, surely rates should have fallen more aggressively. The lengthy consolidation below this resistance level also implies that in the event of a breakout, expect to see a strong continuation to the upside.
Ahead of 1.2200, there is a shorter-term potential resistance at 1.2135, which was support earlier in the week. If we go back above this level, this would be the first sign that the sellers are getting into a spot of bother. The bears will be in real trouble if we then go on to take out the 1.2200 handle.
If so, the next bullish objective would be the liquidity above the post-lockdown high of 1.2260ish, where undoubtedly a cluster of trapped traders’ buy stop orders would be resting. Above this level, there is not much further obvious targets until the psychologically-important 1.25 handle, where we also have the 61.8% Fibonacci retracement converging.
Meanwhile, in terms of support, 1.2100 is the first line of defence for the bulls, which was tested on Thursday and the price has held above it. Lose this and we could see a potential re-test of the 1.2000 psychological handle next, or even the point of origin of the breakout at 1.1920ish. But ideally, from a bullish point of view, we don’t want to see the price re-turning to these levels again.
So, the GBP/CHF looks poised for a bullish breakout in the coming weeks. Bullish traders may therefore wish to get on board before the potential breakout happens for a better reward-to-risk profile, while conservative speculators may want to see confirmation in the form of a clean breakout above 1.2200 resistance, before looking to enter on the long side. For the sellers, the current fundamental and technical backdrops do not paint a particularly bearish outlook for this pair. Therefore, this group of market participants may wish to wait for some clear evidence that suggests rates have topped before potentially stepping in.