USD/CHF holds gains near 0.7925 as failed US-Iran talks and inflation fears support USD

USD/CHF regains positive traction on Monday as failed US-Iran peace talks boost the USD.
Reviving inflation fears reaffirm hawkish Fed expectations and also benefit the Greenback.
The setup favors bullish traders and backs the case for a further intraday appreciating move.

Haresh Menghani FXStreet

The USD/CHF pair kicks off the new week on a positive note and recovers further from a nearly three-week low, around the 0.7855 area, touched on Friday. Spot prices, for now, seem to have snapped a five-day losing streak and currently trade around the 0.7925 region, up 0.50% for the day, amid a broadly firmer US Dollar (USD).

The global risk sentiment takes a turn for the worse in reaction to failed US-Iran peace talks over the weekend and benefits the USD's global reserve currency status. Despite nearly 21 hours of intense discussions, high-level negotiations between the US and Iran ended without a breakthrough. Adding to this, US President Donald Trump said that the US Navy would start blockading any and all ships trying to enter or leave the Strait of Hormuz, raising the risk of a further escalation of tensions in the region.

Meanwhile, the latest developments trigger a sharp rally in Crude Oil prices and revive inflationary concerns, which might force major central banks, including the US Federal Reserve (Fed), to adopt a more hawkish stance. Furthermore, hot inflation data released on Friday led investors to abandon bets on Fed rate cuts this year and shift focus towards potential rate hikes. This is reinforced by a fresh leg up in US Treasury bond yields, which turns out to be another factor offering support to the Greenback.

The Wall Street Journal, citing officials familiar with the discussions, reported that regional countries are working to bring the US and Iran back to the negotiating table within days. This keeps the door open for further diplomacy, which keeps a lid on additional USD gains. That said, the USD/CHF pair showed some resilience below the 100-day Simple Moving Average (SMA), and the subsequent move favors bullish traders. This suggests that the path of least resistance for spot prices is to the upside.

Swiss Franc FAQs

What key factors drive the Swiss Franc?

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.

Why is the Swiss Franc considered a safe-haven currency?

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.

How do decisions of the Swiss National Bank impact the Swiss Franc?

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.

How does economic data influence the value of the Swiss Franc?

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.

How does the Eurozone monetary policy affect the Swiss Franc?

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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