USD/CHF trades with modest gains above mid-0.8600s, lacks bullish conviction
- USD/CHF regains some positive traction amid the emergence of some USD buying on Monday.
- Bets for bigger rate cuts by the Fed and rising Middle East tensions to cap gains for the major.
- Traders might also prefer to wait on the sidelines ahead of the US inflation figures this week.
The USD/CHF pair attracts some dip-buying during the Asian session on Monday and currently trades around the 0.8660-0.8665 region, just below last week's swing high.
The US Dollar (USD) kicks off the new week on a positive note in the wake of hawkish comments by the Federal Reserve (Fed) Governor Michelle Bowman on Sunday. Bowman noted that the Fed may not be ready to cut rates in September and still sees upside risks for inflation amid continued strength in the labor market. Apart from this, a generally positive tone around the equity markets undermines the safe-haven Swiss Franc (CHF) and lends some support to the USD/CHF pair.
That said, geopolitical risks stemming from the ongoing conflicts in the Middle East keep a lid on the market optimism. In fact, the Israel Defense Forces (IDF) intercepted approximately 30 projectiles that were identified as crossing from Lebanon into northern Israel early Monday morning. Furthermore, the Israeli Air Force and Military Intelligence Directorate have been placed on high alert following observations in Western Iran, suggesting that Iran may attack Israel within days.
Apart from this, expectations for bigger interest rate cuts by the Fed might hold back the USD bulls from placing aggressive bets and contribute to capping the upside for the USD/CHF pair. Traders also seem reluctant and might prefer to move to the sidelines ahead of this week's release of the latest inflation figures from the US – the Producer Price Index (PPI) and the Consumer Price Index (CPI) on Tuesday and Wednesday, respectively.
In the meantime, the fundamental backdrop makes it prudent to wait for some follow-through buying before positioning for an extension of the USD/CHF pair's recent goodish recovery move from the 0.8430 area, or the lowest level early January touched last week.
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
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
