USD/CHF edges lower below 0.9000, US CPI data looms
- USD/CHF loses momentum around 0.8995 in Thursday’s early European session.
- Fed’s Powell said the case for interest rate cuts is becoming stronger as inflation data showed some modest further progress.
- Political uncertainty in Europe and globally might boost the safe-haven flows, benefiting the CHF.
The USD/CHF pair trades with mild losses near 0.8995, snapping the three-day winning streak during the early European session on Thursday. The rising Federal Reserve (Fed) rate cut bets drag the pair lower. Traders await the US June Consumer Price Index (CPI) inflation data on Thursday, which is expected to show an increase of 3.1% YoY in June.
The Fed Chair Jerome Powell's comments continue to undermine the Greenback as traders see the US central bank begin its rate-cutting cycle in September. Powell said in testimony Tuesday to Congress that the case for interest rate cuts is becoming stronger as the most recent inflation data showed some modest further progress. He further stated that "more good data" could open the door to interest rate cuts.
However, the softer CPI inflation data for June could fuel the expectation of September rate cuts, which might exert some selling pressure on the Greenback. Financial markets are now pricing in less than a 10% chance of a Fed July rate cut, while the expectation for a September cut stood at 73%, according to the CME FedWatch Tool.
On the Swiss front, the speculation that the Swiss National Bank will cut further interest rates might weigh on the CHF. Kyle Chapman, FX markets analyst at Ballinger Group said "I expect the SNB to follow up with a third cut next quarter, and there is potential for a fourth in December if there is still high conviction in the restrictive level of monetary policy. The dovish outlook puts the franc in a vulnerable position over the coming quarters and could hinder any further recovery, particularly if the ECB takes its time in bringing rates down.” Elsewhere, political uncertainty in Europe and elsewhere might boost the Swiss Franc (CHF), which is a safe-haven currency.
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.
