- USD/CHF regains ground due to lower-than-expected Swiss inflation.
- The Swiss CPI came in at 1.3%, down from May's four-month high and below the market expectation of 1.4%.
- Fed’s Austan Goolsbee stated that bringing inflation back to 2% will require time.
The USD/CHF recovers recent losses, trading around 0.9030 during the early European hours on Thursday. The Swiss Franc (CHF) struggles due to a slowdown in Swiss inflation. The Consumer Price Index (CPI) for June decreased to 1.3% year-over-year, from May's four-month high and below market expectations of 1.4%.
On a monthly basis, the CPI remained unchanged in June after a 0.3% rise in May. Additionally, the core CPI, which excludes volatile items such as unprocessed food and energy, decreased to 1.1% year-on-year in June from 1.2% in the previous month.
The US Dollar (USD) struggles as softer data from the United States (US) escalated speculations of the Federal Reserve (Fed) reducing interest rates in 2024. US ISM Services PMI fell sharply to 48.8 in June, marking the steepest decline since April 2020. This figure was well below market expectations of 52.5, following a reading of 53.8 in May. The ADP Employment report showed that US private businesses added 150,000 workers to their payrolls in June, the lowest increase in five months. This figure fell short of the expected 160,000 and was below the downwardly revised 157,000 in May.
Federal Reserve Bank of Chicago President Austan Goolsbee stated on BBC Radio on Wednesday that bringing inflation back to 2% will take time and that more economic data are needed. However, on Tuesday, Fed Chair Jerome Powell said that the central bank is getting back on the disinflationary path, per Reuters.
The US Dollar Index (DXY), which measures the USD against six major currencies, is under pressure due to lower US Treasury yields. The DXY is trading around 105.30 at the time of writing. As of Wednesday’s close, the yields on 2-year and 10-year US Treasury bonds were 4.70% and 4.35%, respectively. US markets will be closed on Thursday in observance of the Independence Day holiday.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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