After months and months of near record-low volatility, the FX market has seen a considerable rebound in activity. This means conditions are unfavorable for range trades. To whittle away as much risk of a breakout as possible, we chose a pair with light economic calendars, a relatively narrow spread and parallel expectations from the member central banks for future rate policy. EURCHF enjoys all of these qualities. What’s more, a clear head-and-shoulders formation defines the technical risk. The short trade on a test of the shoulder is the optimal position for this range. In fact, if the right shoulder holds up, trying to play the bottom of the range would be extremely risky since this particular technical formation typically progresses into a break of the neckline (seen at 1.6415). The suggested strategy has strong risk/reward. The target is well within means given the standard range for a day; though in sustaining risk/reward, the stop is somewhat close. Covering the 5/21 spike high at 1.6613 would be optimal, but does not fit with money management rules. Ultimately, a break or new trend for EURCHF will most likely be decided on a follow through with the recent wave of risk aversion. Therefore, global equity market performance and other carry pairs like AUDJPY, NZDJPY and USDJPY should be monitored for guidance.



Euro Zone
The economic calendar for the Euro-zone will be sparse over the course of the next week following Wednesday’s ECB decision. Next Thursday’s event risk should draw the most attention though, as inflation data for the month of May will hit the tape. Both headline and core Euro-zone CPI are anticipated to hold at a lofty 1.9 percent – just below the ECB’s 2 percent ceiling – but a surprise jump above the upper limit could leave FX traders in a frenzy to price in another rate hike. The following day, markets will look towards the Euro-zone Trade Balance which should show a surplus once again. However, the release is not typically market moving and isn’t likely to do so this time around either.
Switzerland
The major piece of fundamental risk this week comes next Thursday, when the Swiss National Bank will announce their decision adjustment to the 3-month Libor target rate. While the central bank is widely expected to hike rates, the decision isn’t likely to do much for the Swiss franc in the long-term, as the carry trade will likely continue to work against the currency. However, the Swissie may see a brief, sharp gain upon the announcement of rate normalization as such policy action is undoubtedly bullish. The other piece of scheduled news comes on Friday. While Adjusted Retail Sales are estimated to ease back in April, this volatile indicator does not tend to be much of a market mover, so traders may find it more advantageous to keep an eye on broad carry trade trends as well as USDCHF price action.

Terri Belkas is a Currency Analyst for FXCM.