USD/CHF loses ground below 0.8050 on US rate cut prospects

USD/CHF softens to around 0.8045 in Tuesday’s early European session.
Weaker US Manufacturing PMI data boosts the case for a US rate cut.
The Swiss economy shrank significantly in the third quarter.

Lallalit Srijandorn FXStreet

The USD/CHF pair trades in negative territory near 0.8045 during the early European session on Tuesday. The prospect of a US interest rate cut in December weighs on the US Dollar (USD) against the Swiss Franc (CHF). Traders brace for the Swiss Consumer Price Index (CPI) inflation report on Wednesday, along with the US ADP Employment Change and US ISM Services Purchasing Managers Index (PMI) data.

Weaker-than-expected US economic data and dovish comments from a US Federal Reserve (Fed) official have boosted the expectation of a rate reduction this month, which has dragged the Greenback lower. Financial markets are currently pricing in nearly an 85% chance of a 25 basis point (bps) rate cut, according to the CME FedWatch tool.

Furthermore, a report that White House economic adviser Kevin Hassett has emerged as the frontrunner to be the next Fed chair might contribute to the Greenback’s downside. Hassett is seen as a close ally who supports US President Donald Trump's call for quicker and deeper interest rate reduction to stimulate the economy.

Nonetheless, the Swiss Gross Domestic Product (GDP) contracted by 0.5% QoQ in the third quarter (Q3), compared to an expansion of 0.2% in the previous reading (revised from 0.1%), the State Secretariat for Economic Affairs (SECO) showed on Friday. This figure came in weaker than the -0.4% expected. The downbeat Swiss GDP data could undermine the CHF and cap the downside for the pair in the near term.

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

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.

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