The potential upcoming interest cut on 6 June from the ECB is likely to have been fully priced in by the markets. However, the forward guidance from ECB officials on the timing of subsequent rate cuts remains ambiguous. The consensus forecasts for the current Eurozone core inflation deceleration trend may have plateaued in May, leading to uncertainties in the market.
These factors are likely to support a further potential widening of the premium observed in the Eurozone/Switzerland 2-year sovereign bond yield spread. The 2-year Eurozone sovereign bond yield is currently trading at a premium over Switzerland, which has led to a medium-term bullish breakout in the spread. This widening premium has supported the ongoing medium-term uptrend in the EUR/CHF cross pair.
Since the last analysis, the EUR/CHF cross pair has experienced a minor corrective slide, almost touching the key support zone of 0.9540/9470. It then rebounded and rallied to hit a 52-week high of 0.9930. The recent surprise rate cut by the Swiss National Bank has impacted the Swiss franc’s performance against other G-10 currencies, including the EUR. The CHF has tumbled against the EUR and is ranked as the third weakest CHF cross pair.
ECB officials have indicated a widely anticipated first interest cut of 25 bps in the Eurozone for the upcoming June meeting. While this cut is expected, the timing of subsequent rate cuts remains uncertain. Some officials have expressed concerns about keeping policy in “restrictive territory” despite the planned rate cut. Private sector economists are forecasting an unchanged pace of Eurozone core inflation growth for May, indicating a potential plateau in the deceleration trend.
Potential Impacts on EUR/CHF
The murky forward guidance from ECB officials and the expected plateau in Eurozone inflation growth may continue to support the current yield premium in the 2-year Eurozone sovereign bonds over Switzerland bonds. The ongoing widening of the premium in the bond yield spread has been a key factor in the medium-term uptrend of the EUR/CHF pair. If the key medium-term support at 0.9830 holds, the pair may see further upside towards the next resistance zone at 1.0040/1.1000. However, a break below 0.9830 could shift the tone to the downside, exposing key support levels at 0.9680 and 0.9575.
The upcoming ECB interest cut and the uncertainties surrounding the timing of subsequent rate cuts can have a significant impact on the EUR/CHF pair. The widening premium in the 2-year sovereign bond yield spread between Eurozone and Switzerland, coupled with technical analysis, suggests potential trading opportunities in the medium-term. Traders and investors should closely monitor the key support and resistance levels to make informed decisions in the current market environment.