USD/CHF attracts some buyers above 0.8650, focus on US PPI report
- USD/CHF trades in positive territory for the second consecutive day near 0.8670 in Tuesday’s European session.
- Investors await the US July PPI report, which is due later on Tuesday.
- The safe-haven flows might support the CHF and cap the pair’s upside.
The USD/CHF pair trades with a bullish bias around 0.8670 during the early European session on Tuesday. Traders prefer to wait on the sidelines ahead of the US key economic data this week. The US Producer Price Index (PPI), Consumer Price Index (CPI) and Retail Sales will be released on Tuesday, Wednesday, and Thursday, respectively.
Traders have priced in nearly 47.5% odds that the US Federal Reserve (Fed) will cut the interest rate by 50 basis points (bps) at its September meeting, down from 52.5% last Friday, according to the CME FedWatch Tool. If the US inflation data this week show that the inflation remains elevated, this could diminish the odds of a Fed rate cut and lift the US Dollar (USD).
The US Producer Price Index (PPI) is projected to ease to 0.1% month-over-month in July from 0.2% in the previous reading. The CPI inflation is estimated to drop from 3.0% YoY in July to 2.9% in June.
On the other hand, rising geopolitical tensions in the Middle East and economic uncertainty might boost the safe-haven currency like the Swiss Franc (CHF). On Monday, Israel intensified its operations in the southern Gaza city of Khan Younis, raising the prospect of a wider Middle East conflict. Israel is also bracing for an impending attack from Iran and the Lebanese militia Hezbollah in retaliation for the killing of Hamas leader Ismail Haniyeh in Tehran in late July.
Swiss Franc FAQs
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.
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.
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.
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.
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
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
