USD/CHF: Dollar falls for second day

The dollar has continued to trade lower for a second consecutive day. This is because some of the major currency pairs such as the EUR/USD and even the GBP/USD have bounced back noticeably, while safe-haven flows have supported the likes of Swiss franc, Japanese yen and gold in favour of the dollar ahead of Wednesday's FOMC rate decision. Global stock indices have rebounded off their lows, but overall sentiment remains negative after Wall Street suffered a drop of more than 2% in the previous session.

The greenback has been undermined by growing speculation that, at best, the Federal Reserve will deliver a dovish rate hike, while there is a possibility – a small possibility, but a possibility nonetheless – that it could even hold off hiking altogether. The central bank has come under heavy criticism from the US President Donald Trump, who is arguing that the recent slowdown of economic growth in China and elsewhere in emerging markets, and not to mention the dollar's strength, warrant lower rates for longer.

Trump was at it again today. In a tweet, he has said that: "I hope the people over at the Fed will read today's Wall Street Journal Editorial before they make yet another mistake. Also, don't let the market become any more illiquid than it already is. Stop with the 50 B's. Feel the market, don't just go by meaningless numbers. Good luck!" It was just yesterday when Mr Trump tweeted that he was surprised that the US central bank "is even considering" raising interest rates again this week.

You really have to feel sorry for the Fed Chair, Jerome Powell, who has been put in a very tricky situation here. Mr Powell will be criticised further by Trump if he pushes for a rate hike – a decision which could potentially cost him his job – while if he listens to the President, and pushes for a hold, he will be risking damaging the Fed's credibility as an independent central bank. We think, the Fed has to bite the bullet and hike, but provide a very dovish outlook in order not to displease the President too much.

USD/CHF breaking down?

So, whichever way you look at it, the prospects of a dovish outlook from the Fed may mean we could see further dollar weakness going forward. One interesting pair to watch for potential dollar-weakness is the USD/CHF, which has been putting in lower highs since 12th November, despite the Dollar Index meanwhile hitting new higher highs. The franc has been among the outperformers, in other words. This has been due mainly to safe haven flows, given the equity market sell-off. We think that the USD/CHF could break below its 200-day average (~0.9910) and head below this month's earlier low of 0.9860/5, but potentially a lot lower in the event of a full-blown dollar sell-off. We would be wrong in our bearish view on this pain in the event it rises back above the most recent high at 1.0010 or forms a distinct bullish reversal pattern at lower levels first.