USD/CHF finds support above 0.8150 and holds weekly gains

The US Dollar remains steady at the upper range of the 0.8100s, on track to a 0.7% weekly recovery..
The SNB cut rates to 0% on Thursday and is likely to introduce negative rates before the end of the year.
Fed Powell struck a hawkish note on Wednesday and provided support to the US Dollar.

Guillermo Alcala FXStreet

The US Dollar was rejected on Thursday at 0.8715, but downside attempts have remained capped above 0.8450 on Friday, which leaves the pair on track to close the week with a 0.7% advance.

The Swiss Franc lost ground during the week as the market anticipated that the Swiss National Bank would cut rates by 25 basis points on Thursday, bringing its benchmark interest rate to 0%, as it finally was the case.

SNB-Fed monetary divergence may weigh on the CHF

The Swiss Franc trimmed losses on Thursday with traders closing positions in a clear “buy the rumour, sell the news” case, but downside attempts have remained limited. Market sources suggest that the Swiss will be the first major central bank to introduce negative rates, pressured by a deflationary economy, which is likely to act as a headwind for the CHF.

The Federal Reserve, on the other hand, delivered a substantially more hawkish message, which has provided additional support to the US Dollar.

The Fed kept its benchmark rates on Wednesday and maintained its projections of two rate cuts in 2025, but Chairman Powell dismissed those estimations, citing higher inflationary pressures stemming from Trump’s tariffs and cast doubt about the September rate hike investors were hoping for.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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