USD/CHF approaches 0.8700 with US Inflation on horizon

USD/CHF marches toward 0.8700 as safe-haven flows to the Swiss Franc have diminished.
Investors divide over the size of Fed’s interest-rate cuts in September.
Investors await the US PPI and CPI data for July, which will be published at 12:30 GMT and Wednesday, respectively.

The USD/CHF pair gains to near 0.8675 in Tuesday’s European session. The Swiss Franc asset strengthens as the appeal of the Swiss Franc as a safe-haven asset diminishes due to waning risks of the United States (US) entering a recession.

Fears of a potential US recession faded after upbeat weekly Initial Jobless Claims. Also, the think tank discussed that the Nonfarm Payrolls (NFP) data for July was not as bad as exhibited by sheer sell-off in global equities.

Currently, the market sentiment is cheerful with investors focusing on the US Consumer Price Index (CPI) data for July, which will be published on Wednesday. S&P 500 futures have posted significant gains in the European session. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges higher to near 103.25.

The US CPI report is expected to show that annual headline and core inflation, which excludes volatile food and energy prices, decelerated by one-tenth to 2.9% and 3.2%, respectively. Monthly headline and core inflation are estimated to have risen by 0.2%.

The inflation data will provide cues about when and how much the Federal Reserve (Fed) will reduce interest rates this year. Currently, financial markets are divided about the size of interest-rate cut in September. The CME FedWatch tool shows that the likelihood of a 50 basis point (bp) rate reduction is 49.5%.

Before the US CPI data, investors will focus on the Producer Price Index (PPI) report for July, which will be published at 12:30 GMT. Annual headline and core PPI are expected to have decelerated by three-tenth to 2.3% and 2.7%, respectively.

Economic Indicator

Consumer Price Index ex Food & Energy (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as the Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The CPI Ex Food & Energy excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally speaking, a high reading is bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

The US Federal Reserve has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

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