The USD/CHF pair has been under intense selling pressure recently, driven by safe-haven flows into the Swiss franc. However, with extreme oversold conditions, favourable macroeconomic fundamentals, and growing institutional bearish sentiment towards CHF, a potential reversal is brewing. Here is a detailed analysis explaining why a long USD/CHF setup is worth monitoring.

Fundamental Analysis

The fundamental backdrop continues to favour the U.S. dollar over the Swiss franc.

• U.S. Economic Strength:
  • GDP Growth remains resilient at 2.4%, while GDP Annual Growth stands at 2.5%.
  • Inflation, although lower, is sticky at 2.8% YoY, keeping the Federal Reserve firmly in a higher-for-longer policy stance with rates at 4.5%.
  • Consumer and business confidence remain high, underlining the robustness of the U.S. economy.
• Swiss Economic Fragility:
  • Switzerland’s GDP Growth is sluggish at 0.2%, and inflation is near zero at 0.3% YoY, suggesting weak domestic demand.
  • The Swiss National Bank (SNB) maintains ultra-low interest rates at 0.25%, offering little yield attraction compared to the U.S.

While Switzerland’s strong trade surplus and current account are positive, in the current environment, growth and interest rate differentials dominate currency moves. On these fronts, the dollar is clearly superior to the franc.

Technical Analysis

The technical structure of USD/CHF shows extreme bearishness but also hints at a potential exhaustion of the selloff.

• Ichimoku Cloud Analysis:
  • Price is far below the Cloud, confirming a strong bearish trend.
  • Lagging Span (Chikou Span) is below price and the Cloud, reinforcing bearish momentum.
  • The Tenkan-Sen and Kijun-Sen are sharply declining with a wide gap, indicative of strong downside momentum.
  • The Future Kumo is clearly bearish, with Leading Span A below Leading Span B.
• RSI Analysis:
  • The Relative Strength Index (RSI) is deeply oversold at 22.45.
  • Such extreme readings typically precede at least a corrective rally.
• MACD Analysis:
  • The MACD line is below the Signal line with a strongly negative histogram.
  • However, the histogram shows early signs of flattening, hinting at a potential slowdown in bearish momentum.
• Volume Analysis:
  • Recent high volume on down days signals capitulation selling, which often marks turning points.
• Candlestick and Price Action Analysis:
  • Large bearish candlesticks dominate the recent action, but without new lows in subsequent candles, a potential selling exhaustion is forming.

Overall, while the trend is bearish, technical signals suggest oversold conditions could trigger a relief rally soon.

Sentiment Analysis

Sentiment indicators show a strong divergence between retail and institutional positioning.

• Commitments of Traders (COT) Data:
  • Institutional traders have increased short positions on CHF, indicating growing bearish sentiment on the Swiss franc.
• Retail Trader Positioning:
  • 85% of retail traders are long USD/CHF, a contrarian bearish indicator.
  • However, institutional positioning carries more weight, especially at extreme price levels.

Overall, sentiment analysis suggests institutional traders are preparing for a potential CHF weakness, aligning with the case for a USD/CHF rebound.

Conclusion

A long position on USD/CHF is a medium-conviction trade backed by supportive fundamentals, extreme technical oversold conditions, and institutional sentiment favouring the U.S. dollar:

• The U.S. economy is fundamentally stronger, with growth and interest rate advantages over Switzerland.
• USD/CHF is technically oversold, with momentum indicators suggesting the selloff could be exhausted.
• Institutional sentiment is turning more bearish on the franc, supporting the case for a USD/CHF rebound.

Given the prevailing strong bearish trend, patience is required. Traders should await clear signs of reversal, such as bullish candlestick formations or RSI divergence, before committing to a long position.

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