USD/CHF falls half a percent amid expectations the Fed will cut interest rates multiple times

The USD/CHF pair trades down in the 0.8850s on Wednesday, driven by growing expectations that the US Federal Reserve (Fed) will cut interest rates in September. Such a move would weaken the US Dollar (USD), as lower interest rates tend to attract less foreign capital inflows.

According to the CME FedWatch Tool, which uses the price of 30-day Fed Funds futures to calculate probabilities, there is a 95% chance of a Fed rate cut in September, with two more cuts likely by the end of the year. This expectation is weighing heavily on the USD, contributing to its decline against the Swiss Franc (CHF).

Another factor impacting USD/CHF is the news that US Vice President Kamala Harris has secured enough delegates to clinch the Democratic nomination. The latest Ipsos Reuters poll shows Harris leading Donald Trump, prompting some unwinding of the "Trump trade," which is typically correlated with higher US yields and a stronger USD.

Meanwhile, the Swiss National Bank (SNB) reduced its key policy rate by 0.25% to 1.25% in June 2024, following a similar move in the previous meeting. The move came as the country continued to experience lower inflation, partly as a result of the strength of the Swiss Franc (CHF). Inflation in Switzerland is currently driven mainly by higher prices for domestic services. The SNB's new conditional inflation forecast is similar to March's, predicting average annual inflation of 1.3% in 2024, 1.1% in 2025, and 1.0% in 2026, assuming the policy rate remains at 1.25%, according to Trading Economics. Official figures showed inflation edged down to 1.3% in June, matching the SNB's projections.

USD/CHF traders are now looking forward to upcoming US economic data for clarity on the trajectory of US interest rates. Key releases include the US Q2 Gross Domestic Product (GDP) growth data on Thursday and the Personal Consumption Expenditures (PCE) Price Index report for June on Friday. Additionally, the preliminary US July S&P Global Purchasing Managers Index (PMI) will be released on Wednesday, providing fresh impetus for traders.

The Q2 GDP growth advance estimate is expected to show a 1.9% expansion, up from 1.4% in Q1, while the PCE price index is forecasted to see a 0.1% uptick after remaining flat in May. Although cooling US headline consumer inflation has bolstered expectations for a September rate cut, the likelihood of further cuts remains uncertain. If the data surprises to the upside, the Fed may delay lowering interest rates beyond September, which would support the USD/CHF pair.

On the Swiss data front, the CHF was supported by trade surplus data, which increased to 4.9 billion CHF in June 2024 from an upwardly revised 4.2 billion CHF in the previous month, marking the largest trade surplus since September 2023. Exports increased by 1.2% month-on-month to 23.3 billion CHF, driven by higher sales of vehicles (+5%) and chemical-pharmaceutical products (+2.9%), said Trading Economics.