USD/CHF – Is the dollar headed for more downside?

<p>With the exception of January’s massive plunge that was prompted by the Swiss National Bank (SNB) removing the exchange rate floor on the value of […]</p>

With the exception of January’s massive plunge that was prompted by the Swiss National Bank (SNB) removing the exchange rate floor on the value of the euro versus the Swiss franc, thereby compelling the franc to skyrocket, the USD/CHF currency pair generally reflects overall US dollar movement relatively well.

Tuesday saw a sharp drop for USD/CHF as the dollar pulled back on continued market expectations that a Fed rate hike could potentially be delayed beyond the end of the year. This drop resulted in a tentative breakdown below a large rising wedge pattern that has been in place since mid-August. While a rising wedge pattern represents gradually increasing prices within a consolidation, the potential resolution of such a pattern is most often viewed as bearish. The trigger for this bearish outlook would be a confirmed breakdown below the lower border of the pattern.

USD/CHF Daily Chart

 

As USD/CHF has made just a tentative breakdown of the wedge, the pattern completion has not been confirmed yet. With any further move to the downside during the remainder of the week, however, the dollar could find itself extending its current pullback after its recent period of substantial strength.

For more than a week, USD/CHF has been declining from key resistance around the 0.9850 area. From a slightly longer-term perspective, since the multi-year high of 1.0239 was hit in mid-January, just a day before the noted SNB-driven crash, USD/CHF has followed a relatively well-defined downtrend resistance line with progressively lower highs. Although this was NOT accompanied by progressively lower lows, the downtrend line exhibits recurring pressure on the currency pair. Having just retreated from this trend line a little more than a week ago, USD/CHF could continue to undergo short-term pressure to pull back further.

On any continued and confirmed breakdown below the wedge pattern, the next major downside target is around the key 0.9500 support level. To the upside, dynamic resistance continues to reside at the noted downtrend line that extends from January.

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