USD/CHF weakens below 0.8150 ahead of US Retail Sales release
- USD/CHF edges lower to near 0.8135 in Tuesday’s early European session.
- The ongoing conflict between Israel and Iran boosts the safe-haven flows, benefiting the Swiss Franc.
- Traders await the US May Retail Sales data on Tuesday ahead of the Fed interest rate decision.
The USD/CHF pair softens to around 0.8135 during the early European session on Tuesday. The persistent geopolitical risks in the Middle East provide some support to the Swiss Franc (CHF) against the US Dollar (USD). Traders brace for the US Retail Sales data for May, which is due later on Tuesday.
The conflict between Israel and Iran has entered its fifth day despite world calls for negotiation and de-escalation. Late Monday, US President Donald Trump called for the evacuation of Iran’s capital Tehran, hours after urging the country’s leadership to accept a deal to limit its nuclear program, even though Israel indicated that attacks would continue. Heightened geopolitical tensions in the Middle East are likely to boost the safe-haven flows, supporting the CHF in the near term.
Nonetheless, any signs of easing geopolitical tensions might drag the CHF lower and act as a tailwind for the pair. There was some hope on Monday that the situation would not worsen when Iran reportedly asked many countries to put pressure on Israel for a ceasefire.
The US Federal Reserve (Fed) interest rate decision will take center stage on Wednesday, which is expected to keep interest rates steady at its June meeting. Futures markets expect two rate cuts by year-end, possibly beginning in September, bolstered by softer inflation data last week.
Traders will take more cues from the FOMC Press Conference. "If the Fed delivers a dovish hold as we expect, the dollar is likely to resume weakening due to the worsening fundamental backdrop in the U.S,” said Win Thin, global head of markets strategy at Brown Brothers Harriman.
Swiss Franc FAQs
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.
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.
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.
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.
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.
