Swiss Franc remains depressed despite brightening ZEW Economic Expectations

The US Dollar (USD) holds gains near 13-month highs against the Swiss Franc (CHF), with the USD/CHF pair trading a few pips shy of 0.8200, set for a 1.3% monthly rally. Swiss ZEW Economic sentiment has shown a significant improvement in July, but the monetary policy divergence between the Swiss National Bank (SNB) and the Federal Reserve (Fed) is hammering the CHF.

Data released by the Swiss Centre for European Economic Research revealed that the ZEW Economic Expectations Index jumped to 10 in July, its best reading since November last year, and a significant improvement from the -25 witnessed in June and May’s -11reading.

The Swissie bleeds as markets bake a Fed hike in September

The Swiss Franc, however, remains on its back foot amid rising bets of Fed monetary tightening, while the SNB is not expected to lift its benchmark interest rate from the current 0% level in the foreseeable future.

The Federal Open Market Committee (FOMC) ends its two-day monetary policy meeting later on Wednesday, and is likely to leave interest rates unchanged, although markets are pricing a one-in-three chance of a quarter -point rate hike. Chairman Warsh, however, might show concern about the high inflationary risks, hinting at interest rate hikes in the near-term, which are likely to underpin demand for the US Dollar.

According to strategists at Rabobank, market expectations have shifted to the point where “the September meeting is now fully-priced for a 25bp hike, with another hike in the curve for March next year.” However, they stress that this market stance is not aligned with their own baseline, noting that “in reality, few expect the Fed to raise rates at this meeting (we certainly do not),” even if “we may see some FOMC members dissent in favour of lifting rates.”