One of the currency pairs on “holiday” this summer, the GBPCHF, sees signs of life. It pushed back to the magical 1.20 level – a level where it only met resistance multiple times during the summer trading months.
In fact, right after the CHF’s run higher in March, the GBPCHF cross stalled at the 1.20. It lacked momentum but found buyers on every dip.
Long-term horizontal consolidations like the one seen on this cross, usually appear before powerful breakouts. In terms of the Elliott Waves Theory, long-term, complex, horizontal consolidation form as the second wave ahead of an extended third wave.
Bank of England Disregarding Negative Rates for Now
During the current economic crisis generated by the pandemic, central banks around the world scratch their heads to find the right way to stimulate economic activity and to generate growth. Often, they get inspired by what peer central banks do. For instance, the Bank of England announced a while ago that it studies negative rates and the possible effects on the U.K. economy.
The pound suffered on the news. But quickly after that, it rebounded as Bank of England noticed positive effects from negative interest rates only in expanding economies. Hence, this is not a solution in a crisis.
GBPCHF Technical Analysis
Considering the sharp rebound from the lows and then the horizontal consolidation that follows, we may interpret the pattern as a huge bullish flag. Moreover, the 1.20 acts as horizontal resistance, give it or take a hundred pips points.
But when the price action keeps pushing against horizontal resistance while forming multiple higher lows, the resistance will eventually give way. This is what makes the current GBPCHF setup interesting.
To trade it, consider placing a pending buy-stop order at 1.2150. This way, we make sure a breakout exists. Next, place a stop-loss at the previous higher low and target a 1:3 risk-reward ratio.
Don’t forget to adjust the traded volume so as to risk only 1% of your trading account. To learn more about money management, consider enrolling in one of our trading coaching programs.