- USD/CHF edges lower as the US Dollar faces challenges amid dovish sentiment surrounding the Fed.
- Traders adopt caution ahead of US CPI inflation report due on Wednesday.
- The Swiss Franc could have received support from safe-haven flows amid rising geopolitical tensions in the Middle East.
USD/CHF remains tepid for the second successive day, trading around 0.8650 during the Asian hours on Wednesday. The USD/CHF pair faces challenges as the US Dollar (USD) struggles with dovish sentiment surrounding the US Federal Reserve (Fed) regarding its monetary policy outlook.
However, the recent downbeat Producer Price Index (PPI) data from the United States (US) have decreased the bets for a bigger interest rate cut by the US Federal Reserve (Fed) in September. Furthermore, traders will likely observe the US CPI inflation report on Wednesday, which could offer some hints about the Federal Reserve’s (Fed) interest rate cut path.
Additionally, Reuters reported on Tuesday, that Atlanta Fed President Raphael Bostic stated that recent economic data has increased his confidence that the Fed can achieve its 2% inflation target. However, Bostic indicated that additional evidence is required before he would support a reduction in interest rates.
Safe-haven demand may have bolstered the Swiss Franc (CHF) amidst escalating geopolitical tensions in the Middle East. On Tuesday, the United States deployed a guided missile submarine to the region, according to the BBC. Additionally, Israeli forces continued their operations near Khan Younis in southern Gaza on Monday. CBC News reported that Palestinian medics indicated Israeli military strikes on Khan Younis on Monday resulted in the deaths of at least 18 people.
Traders are likely anticipating Swiss Producer and Import Prices data for July, scheduled for release on Thursday, with expectations pointing to a slight increase in the cost of imported goods. On Friday, the focus will shift to the annual Industrial Production report for the second quarter, which may show a decline in production volumes.
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.
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