Swiss Franc remains on the front foot against USD as traders eyes geopolitics, Fed bets

USD/CHF attracts some sellers in the vicinity of 0.8100 amid a modest USD weakness on Monday.
Escalating US-Iran tensions fuel inflation fears and Fed hike bets, warranting caution for USD bears.
The market focus remains glued firmly on further developments surrounding the Middle East crisis.

Haresh Menghani FXStreet

The USD/CHF pair turns lower for the second straight day following an intraday uptick to the 0.8100 neighborhood and touches a fresh daily low during the first half of the European session on Monday. Spot prices currently trade around the 0.8060 region, down nearly 0.15% for the day, amid a softer US Dollar (USD).

Signs of stability in the global risk sentiment – as depicted by a generally positive tone around the European equity markets – turn out to be a key factor undermining the Greenback's reserve currency status. However, escalating US-Iran tensions, along with reviving US Federal Reserve (Fed) rate hike bets, might hold back USD bears from placing aggressive bets and act as a tailwind for the USD/CHF pair.

In fact, the US completed a ninth straight night of strikes against Iran, while the latter fired ballistic missiles and one-way attack drones targeting US allies in the region. This raises the risk of a broader regional conflict. Adding to this, the closure of the Strait of Hormuz remains supportive of elevated crude oil prices, fueling inflation fears and bolstering hawkish Fed expectations. This could limit deeper USD losses.

Moving ahead, there isn't any relevant market-moving economic data due for release from the US on Monday, leaving the buck at the mercy of comments from influential FOMC members. Apart from this, the incoming geopolitical headlines might continue to infuse volatility in markets and drive the USD demand, which. In turn, it could provide some impetus to the USD/CHF pair and produce trading opportunities.

Swiss Franc FAQs

What key factors drive the Swiss Franc?

The Swiss Franc (CHF) is Switzerland’s official currency. It is among the top ten most traded currencies globally, reaching volumes that well exceed the size of the Swiss economy. Its value is determined by the broad market sentiment, the country’s economic health or action taken by the Swiss National Bank (SNB), among other factors. Between 2011 and 2015, the Swiss Franc was pegged to the Euro (EUR). The peg was abruptly removed, resulting in a more than 20% increase in the Franc’s value, causing a turmoil in markets. Even though the peg isn’t in force anymore, CHF fortunes tend to be highly correlated with the Euro ones due to the high dependency of the Swiss economy on the neighboring Eurozone.

Why is the Swiss Franc considered a safe-haven currency?

The Swiss Franc (CHF) is considered a safe-haven asset, or a currency that investors tend to buy in times of market stress. This is due to the perceived status of Switzerland in the world: a stable economy, a strong export sector, big central bank reserves or a longstanding political stance towards neutrality in global conflicts make the country’s currency a good choice for investors fleeing from risks. Turbulent times are likely to strengthen CHF value against other currencies that are seen as more risky to invest in.

How do decisions of the Swiss National Bank impact the Swiss Franc?

The Swiss National Bank (SNB) meets four times a year – once every quarter, less than other major central banks – to decide on monetary policy. The bank aims for an annual inflation rate of less than 2%. When inflation is above target or forecasted to be above target in the foreseeable future, the bank will attempt to tame price growth by raising its policy rate. Higher interest rates are generally positive for the Swiss Franc (CHF) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken CHF.

How does economic data influence the value of the Swiss Franc?

Macroeconomic data releases in Switzerland are key to assessing the state of the economy and can impact the Swiss Franc’s (CHF) valuation. The Swiss economy is broadly stable, but any sudden change in economic growth, inflation, current account or the central bank’s currency reserves have the potential to trigger moves in CHF. Generally, high economic growth, low unemployment and high confidence are good for CHF. Conversely, if economic data points to weakening momentum, CHF is likely to depreciate.

How does the Eurozone monetary policy affect the Swiss Franc?

As a small and open economy, Switzerland is heavily dependent on the health of the neighboring Eurozone economies. The broader European Union is Switzerland’s main economic partner and a key political ally, so macroeconomic and monetary policy stability in the Eurozone is essential for Switzerland and, thus, for the Swiss Franc (CHF). With such dependency, some models suggest that the correlation between the fortunes of the Euro (EUR) and the CHF is more than 90%, or close to perfect.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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