Is it safe to buy EUR/CHF after plummeting 400 pips points on SNB’s hawkishness?

June ends this week, and it brought several surprises to currency traders. One of them, perhaps the most unexpected, was the Swiss National Bank (SNB) hiking the interest rate by 50bp.

Before going into more details, it should be mentioned that the SNB was the central bank with the most aggressive easing monetary policy before this June meeting. It kept the interest rate below zero, at -0.75bp, for years.

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By raising it to -0.25%, it sent a strong signal to financial market participants. More precisely, it means that it is not seeing the Swiss franc as overvalued anymore and will keep raising the interest rate moving forward.

All eyes are on the parity level

The market has already reacted to the parity level in 2022. It found strong support there, but any bounce was met with heavy selling.

One may say that 1.05 acted as strong resistance, and it is evident that this is the pivotal level to watch. In other words, the EUR/CHF remains bearish while trading below 1.05, but the bias could easily turn bullish should the market move above 1.05.

This is one currency pair with an interesting history that deserves to be mentioned. For several years, the SNB has kept a fixed exchange rate on the cross – 1.20.

But faced with the European Central Bank’s decision to cut rates during Draghi’s Presidency, the SNB was forced to let the 1.20 floor. What followed was true mayhem in the CHF pairs, as they simply melted.

EUR/CHF was first seen below 0.9 before bouncing. It climbed back to 1.20 in the following weeks, only to form a head and shoulders pattern seen on the chart above.

And then the slide began. From 2018, the head and shoulders pattern was followed by a bearish flag.

Moreover, every bounce was met with heavy selling, as the market formed a series of lower lows. Therefore, from a technical perspective, the market remains bearish.

Why did the SNB surprise markets?

Financial market participants have expected the SNB to raise the rates by 25bp. Instead, the central bank decided it was appropriate to hike by 50bp.

It has revised its inflation forecasts up sharply, all the way to 2.8% in 2022. However, the Swiss inflation rate is well below the Euro area inflation. Therefore, the move is proactive, signaling the SNB’s determination to keep inflation low.

All in all, traders should remain constructive on the Swiss franc. While below the pivotal 1.05, another attempt to a move below parity should be in the cards.