USD/CHF falls amid upwards revision to Swiss growth and SNB meeting uncertainty

USD/CHF trades in the 0.8870s on Tuesday, around a quarter of a percent lower on the day, after the release of Swiss government data showed an upwards revision to growth forecasts in 2024. The pair is further pressured by a lack of progress on inflation brings into doubt an expected interest-rate cut from the Swiss National Bank (SNB) at its meeting on Thursday. 

The Gross Domestic Product (GDP) growth rate in Switzerland is forecast to reach 1.2% in 2024 – up from the 1.1% predicted in March – according to figures released by the State Secretariat for Economic Affairs (SECO), on Monday. The GDP growth rate in 2025, meanwhile, is expected to be 1.7%, unchanged from the March estimate.

Consumer prices are forecast to rise by an annual 1.4% in 2024, a downward revision from the 1.5% in March, according to SECO, and in line with the Swiss Statistical Office’s Consumer Price Index (CPI) reading of 1.4% in May.

Despite the downward revision to inflation in the SECO report, the market consensus is that inflation is not making sufficient progress lower to warrant a cut in interest rates by the Swiss National Bank (SNB) on Thursday. 

The May CPI reading showed no change from April’s 1.4% and as a result of this lack of progress on inflation, investors dramatically revised down their expectations of the SNB cutting interest rates at the June meeting. From a probability of 80% prior to the release of May CPI, the probability fell to roughly 50% after, according to Trading Economics. Since lower interest rates are generally negative for a currency, the decline in probabilities led to a strengthening of CHF (decline in USD/CHF). 

The SNB was the first major central bank to begin cutting interest rates when it reduced its key policy rate by 0.25% to 1.5% at its policy meeting in March.

The US Federal Reserve (Fed), in comparison, continues to be reluctant to cut its Fed Funds Rate, which still stands in a range between 5.25% - 5.50%. The differential between the Swiss and US policy rates advantages the US Dollar (USD), and the USD/CHF pair. Investors are drawn to higher interest rates because of the greater return they can earn, increasing foreign capital inflows. 

Although the SECO data showed an upward revision to growth estimates, the report stated that a 1.2% increase in GDP would still be “significantly below average” and the Swiss would not fully recover until 2025.   

“Given that industrial production capacities are far from being fully exploited and financing costs are high, a decline in investment is to be expected. Foreign trade, on the other hand, will be able to provide some support, particularly due to the depreciation of the Swiss franc in recent months,” SECO’s report stated.