Swiss Franc gains as US economic data disappoints and Fed hike bets weaken

The Swiss Franc gains against the US Dollar after softer US employment and services data.
Lower Oil prices ease inflation concerns and prompt traders to trim bets on a September Fed rate hike.
Traders await Friday’s US Nonfarm Payrolls report for fresh monetary policy clues.

Vishal Chaturvedi FXStreet

The Swiss Franc (CHF) strengthens against the US Dollar (USD) on Wednesday as weaker-than-expected US economic data pressures the Greenback, while traders closely follow efforts to reopen the Strait of Hormuz. At the time of writing, USD/CHF trades around 0.8078, down nearly 0.18% on the day.

US ADP Employment Change rose by 44K in July, missing expectations of 70K and slowing from 98K in June. Meanwhile, the ISM Services Purchasing Managers Index (PMI) edged up to 54.1 from 54 but fell short of the 54.5 market forecast.

Oil prices stay under pressure as hopes build that commercial shipping through the Strait of Hormuz could resume soon. Iran and Oman have reached an understanding on the geographic coordinates of a proposed shipping route through the waterway. Iran’s Foreign Ministry said a joint statement is in the final stages of review and drafting, provided “third parties” do not interfere.

Lower energy-driven inflation risks and weaker US labor market data have reduced expectations that the Federal Reserve (Fed) will raise interest rates this year. According to the CME FedWatch Tool, markets now price in around a 56% chance of a September rate hike, down from 67% a day earlier. Traders now turn their attention to Friday’s Nonfarm Payrolls (NFP) report for further clues about the Fed’s next policy move.

However, an informed source told Fars News that an agreement between Iran and Oman would not automatically reopen the Strait. Separate arrangements would still be required, including the fulfillment of US commitments. This keeps uncertainty alive and may discourage traders from placing aggressive directional bets until a final agreement is reached.

On the Swiss side, inflation remains near the lower end of the Swiss National Bank’s (SNB) 0%-2% price stability range. Data released on Monday showed that the Consumer Price Index (CPI) rose 0.4% YoY in July, easing from 0.5% previously. The subdued inflation backdrop reinforces expectations that the SNB will keep its policy rate at zero.

Nonfarm Payrolls FAQs

What are Nonfarm Payrolls?

Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.

How does Nonfarm Payrolls influence the Federal Reserve monetary policy decisions?

The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation. A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work. The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.

How does Nonfarm Payrolls affect the US Dollar?

Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower. NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.

How does Nonfarm Payrolls affect Gold?

Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa. Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold. Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.

Sometimes Nonfarm Payrolls trigger an opposite reaction than what the market expects. Why is that?

Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components. At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary. The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.

Author

Vishal Chaturvedi

FXStreet

I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.

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