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USD/CHF trades flat around 0.7750 as US Dollar wobbles ahead of key US data

  • USD/CHF flattens around 0.7750 while investors await the US data.
  • US private employers are expected to have hired 48K fresh workers in January.
  • SNB Chairman Schlegel remains concerned over the inflation outlook.

The USD/CHF pair trades in a tight range around 0.7750 during the late Asian trading session on Wednesday. The Swiss Franc pair consolidates as investors await the United States (US) ADP Employment Change and the ISM Services Purchasing Managers’ Index (PMI) data for January, which will be published during the North American session.

During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally lower to near 97.30.

Investors will pay close attention to the US data to get fresh cues on the Federal Reserve’s (Fed) monetary policy outlook. The US private sector is expected to have created 48K fresh jobs, slightly higher than 41K in December. The ISM Services PMI is estimated to have dropped to 53.5 from the prior reading of 54.4, indicating that the service sector activity continued to advance but at a moderate pace.

According to the CME FedWatch tool, traders seem confident that the Fed will leave interest rates unchanged in the range of 3.50%-3.75% in the March policy meeting.

Meanwhile, the Swiss Franc (CHF) shows a mixed performance while investors seek fresh cues on the Swiss National Bank’s (SNB) monetary policy outlook. The SNB is likely to hold interest rates at 0% in the near term as they remain concerned over soft inflationary pressures. On Monday, SNB Chairman Martin Schelegl said, “My greatest concern is of course inflation and price stability, and we [SNB] do everything we can to ensure that,” Reuters reported.

US Dollar FAQs

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

Author

Sagar Dua

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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