Swiss Franc holds below 0.7800 amid higher US yields, risk-off markets

USD/CHF stands above 0.7800, holding a moderate recovery from last week's lows, near 0.7760.
Higher US inflationary pressures have crushed hopes of further Fed easing.
Markets are looking at the Trump-Xi meeting with the stalemate in Iran weighing on risk appetite.

Guillermo Alcala FXStreet

The US Dollar (USD) maintains its immediate bullish trend against the Swiss Franc (CHF) intact for now, with the pair standing comfortably above 0.7800, after bouncing at lows near 0.7760 last week. A mild risk-averse sentiment amid growing tensions in the Middle East, and dwindling hopes of further Federal Reserve (Fed) rate cuts, are keeping the Greenback buoyed across the board on Wednesday.

US Consumer Price Index (CPI) data released on Tuesday confirmed the inflationary pressures stemming from Iran’s conflict and practically discarded any further Fed interest rate cut in the foreseeable future.

April’s CPI showed 3.8% year-on-year rate, exceeding the 3.7% market consensus to reach its highest reading since May 2023. Likewise, the core CPI, excluding food and energy prices, rose to 2.8%, above the 2.7% expected and well beyond the Fed’s 2% rate. Futures markets are shifting their view of the Fed’s rate path towards monetary tightening, which is boosting US Treasury yields and underpinning speculative demand for the USD.

Later on the day, April’s Producer Prices Index is expected to follow suit, although the main focus will be on the meeting between US President Donald Trump and his Chinese Counterpart, Xi Jinping. Trump will be looking for China's support to untie Iran’s knot, with the US-China trade, rare earths, and the status of Taiwan also high on the agenda.

The situation in the Middle East, meanwhile, remains stalled. The US President has launched fresh threats to Tehran, but new developments in the conflict are unlikely ahead of the outcome of the Trump-Xi meeting. The Strait of Hormuz remains closed with no clear plan to reopen it on sight, which is keeping Oil prices near $100 and curbing investors’ appetite for risk.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

What are the key assets to track to understand risk sentiment dynamics?

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

Which currencies strengthen when sentiment is "risk-on"?

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

Which currencies strengthen when sentiment is "risk-off"?

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

AUD/USD holds above 0.6950 as bullish USD caps gains

AUD/USD edges lower during the Asian session on Tuesday, stalling a two-day recovery move from a two-month low, touched last week. An extended rout in the fixed income market keeps US bond yields elevated near multi-year highs. This, along with geopolitical uncertainties, helps the US Dollar retain its bullish tone despite receding October Fed hike bets. However, expectations for another RBA rate hike this month could act as a tailwind for the Aussie.

USD/JPY rises back above 158.00 despite hawkish BoJ outlook

USD/JPY rises back above 158.00 in the early European morning on Tuesday. The pair strengthens as the Japanese Yen fails to find any inspiration from hawkish BoJ expectations and looming intervention risks. Meanwhile, geopolitical uncertainty and elevated US bond yields keep the US Dollar near its YTD high despite receding October Fed hike bets. This, in turn, helps the pair stay supported.

Gold seems vulnerable near two-month low amid strong USD, higher US bond yields

Gold sticks to modest intraday losses heading into the European session, though it holds above the $4,100 mark, a two-month low touched earlier this Tuesday. The US Dollar retains its bullish tone and continues to undermine demand for the commodity. However, receding bets for an October Fed rate hike act as a tailwind for the non-yielding bullion and help limit further losses.

Ripple and Stellar weaken as derivatives positioning fades

Ripple (XRP) and Stellar (XLM) face pressure trading below $1.499 and $0.220, respectively, on Tuesday after a modest correction at the start of the week. Traders should be cautious as weakening derivatives metrics and fading bullish momentum suggest further corrections for XRP and XLM. Derivatives data shows a weakening and cautious signal among traders.

Europe in focus as French and Spanish politics drive sentiment

There are no tier-1 releases today. Focus will remain on developments in the European markets and geopolitical developments in the Middle East. In France, the key issue in the coming days will be whether the Socialists and Marine Le Pen's National Rally signal they are willing to topple the government over the budget.

Eurozone inflation just hit 3.8%, its highest in three years. This chart shows why the ECB can’t simply hike its way out

The ECB would normally have a relatively straightforward answer to inflation running almost twice its target: raise interest rates. But these are not normal circumstances. This time, the bond market is already doing part of the tightening for it, leaving the ECB facing an increasingly difficult dilemma.