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EUR/CHF remains above 0.9400 as Euro gains on cautious ECB outlook

  • EUR/CHF appreciates as the Euro receives support from a cautious tone surrounding the ECB policy outlook.
  • Traders believe the ECB concluded its easing cycle in July after delivering eight rate cuts over the past year.
  • A decline in Swiss Producer and Import Prices heightens the chances of the SNB moving rates into negative territory.

EUR/CHF holds gains after registering losses in the previous session, trading around 0.9410 during the Asian hours on Friday. The currency cross recovers its losses as the Euro (EUR) receives support, driven by traders' expectations that the European Central Bank (ECB) has ended its easing cycle in July after eight cuts over the past year, leaving borrowing costs at their lowest since November 2022.

However, the Euro faced challenges as Eurostat reported on Thursday that monthly industrial production in the Eurozone dropped 1.3% in June, falling short of the 1.0% decline expected, reversing May’s upwardly revised 1.1% gain from 1.7%. Meanwhile, output growth slowed sharply to 0.2% YoY, missing the 1.7% forecast and down from a revised 3.1% in May. The European Union (EU) economic docket will be absent as there are no scheduled events due to the Feast of Our Lady of Heaven.

The Swiss Franc (CHF) could come under pressure as recent data show a continued decline in goods and services prices in Switzerland. Softer Producer and Import Prices increase the likelihood of the Swiss National Bank (SNB) pushing interest rates into negative territory.

Thursday’s data revealed a 0.9% year-over-year drop in Producer and Import Prices for July, steeper than June’s 0.7% fall. On a monthly basis, prices slipped 0.2%, following a 0.1% decline in the previous month.

ECB FAQs

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.

Author

Akhtar Faruqui

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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