In our last article we were looking for a turndown in GBP/CHF from resistance and we have seen some weakness and expect more to come.

A Tale of Interest Rate Differentials

In terms of the Bank of England, the interest rate is 5.25% and in terms of the Swiss National Bank, we have an interest rate of 1.25% which makes this a good carry trade in terms of interest rate earnings.

Interest Rate Outlook and Carry Trades

In terms of the market, it only sees one cut from the Bank of England this year and we have noted in previous articles that we think the BoE will be more dovish than the market expects with three cuts. Also, the market is not seeing an August cut which we think is possible. On the other side of the pair with an interest rate of just 1.25%, we dont after two consecutive interest rate cuts from the SNB see another coming this year but see several cuts from the BoE.

The CHF has been sold heavily in several crosses and it's also a safe haven that tends to strengthen when we get risk aversion but in the last few months risk appetite has been high but we expect this to end. Even if the market remains risk on the GBP looks ripe for a correction due to the big speculative net long position.

Speculative Positioning

To get the speculative positioning we are using the COT Net Traders Positions by looking at GBP/USD and USD/CHF positioning to get the cross data If we look at speculative positioning in GBP/USD we have speculators at a record-long position and in terms of USD/CHF we have speculators heavily short of the CHF on the charts below. As all majors are crossed through the USD and we can see the cross is at a bullish extreme...

In terms of the cross data, we express it as a simple ratio of longs v shorts.

If we look at large speculators they hold 12.3 to 1 in terms of longs over shorts and "smart money" commercials hold 8 to 1 in terms of shorts over longs giving us a divergence of 20.3. In terms of divergences, any divergence above 10 will attract our attention and this is more than double the level and points to a sell-off in the CHF.

The market sees no reason for the GBP to fall back but the “good news” in terms of interest rates is discounted – it won't get any better for the GBP and we expect a major sell-off.

Technical Analysis

On the chart below we outline the key levels of support and resistance to look out for.