Swiss Franc struggles even as US Dollar gives back CPI-led gains

USD/CHF holds onto gains on Friday even as the US Dollar (USD) turns lower following the release of the latest United States (US) Consumer Price Index (CPI) report, which strengthened expectations that the Federal Reserve (Fed) could raise interest rates next week.

At the time of writing, the pair trades around 0.8150 after touching an intraday high of 0.8170, its highest level since July 30. The pair is also on track for a third consecutive weekly gain.

The headline CPI rose 0.4% MoM in August, matching market expectations but accelerating from the 0.1% increase recorded in July. Annual inflation held steady at 3.4%, also in line with forecasts. Core CPI, which excludes volatile food and energy prices, increased 0.3% MoM, above the 0.2% forecast, while the annual rate eased to 2.4% from 2.5%.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 99 after briefly climbing to 99.36 in the immediate reaction to the data. However, a pullback in US Treasury yields and Oil prices tempers demand for the Greenback despite the increased rate-hike expectations.

According to the CME FedWatch Tool, markets now price in an 85% chance of the US central bank raising borrowing costs at the September 15-16 meeting, up from 67% earlier in the day.

Meanwhile, preliminary data from the University of Michigan showed that the Consumer Sentiment Index fell to 47.8 in September from 51.7. The Consumer Expectations Index dropped to 45.8 from 51.5. At the same time, 1-year inflation expectations rose to 4.6% from 4.0%, while the 5-year measure increased to 3.4% from 3.3%.

USD/CHF faces limited selling pressure as the Swiss Franc (CHF) underperforms its major peers. SNB Chairman Martin Schlegel said on Friday that “the Swiss Franc exchange rate is a challenge for the Swiss economy,” reinforcing expectations that the central bank is prepared to intervene if the currency appreciates sharply.

Switzerland’s subdued inflation backdrop supports the Swiss National Bank’s (SNB) zero-interest-rate policy, while other major central banks are expected to tighten monetary policy as elevated Oil prices increase global inflation risks.

This would leave Swiss interest rates even further behind those in other major economies, encouraging investors to favour higher-yielding currencies and use the low-yielding Swiss Franc to fund carry trades. The shift is already visible as expectations of faster Bank of Japan (BoJ) tightening strengthen the Japanese Yen (JPY) and trigger the unwinding of Yen-funded positions.