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USD/CHF weakens below 0.8850, Fed rate decision looms

  • USD/CHF loses traction around 0.8820 in Wednesday’s early European session. 
  • Markets expect the Fed to keep the benchmark rates at 5.25%- 5.50% on Wednesday. 
  • The uncertainty and ongoing Middle East geopolitical tensions might lift the Swiss Franc, creating a headwind for USD/CHF. 

The USD/CHF pair edges lower to near 0.8820 amid the decline of US Dollar (USD) during the early European session on Wednesday. The safe-haven flows and Federal Reserve (Fed) rate cuts expectation in September are like to drag the pair lower. Investors await Fed interest rate decision on Wednesday for fresh catalysts. 

The Fed's benchmark rate is anticipated to hold interest rates steady at a 23-year high of 5.25% to 5.5% at its upcoming meeting on Wednesday. ‘’Market focus is on the upcoming Fed policy meeting on Wednesday, July 31, 2024. No changes are expected, but the view of a potential rate cut in September increases the probability of dollar weakness,'' said Jateen Trivedi, VP Research Analyst, Commodity and Currency, LKP Securities. 

The Fed Chair Jerome Powell’s remarks from the press conference might offer some hints about rate cut bets in September. Dovish comments from Powell might continue to undermine the Greenback broadly.

On the other hand, the Swiss Franc (CHF) might benefit from the safe-haven flows amid economic uncertainty and further Middle East geopolitical tensions. The Washington Post reported that Israel carried out an airstrike on a densely populated neighborhood on the outskirts of the Lebanese capital on Tuesday, claiming that it killed a top Hezbollah commander responsible for the deaths of 12 children over the weekend in the Israeli-occupied Golan Heights.

 

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

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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