- USD/CHF drifts lower for the third straight day amid the prevalent USD selling bias.
- Rising bets for a September Fed rate cut move continue to weigh on the Greenback.
- The downside is likely to remain limited as traders await the release of the US NFP.
The USD/CHF pair remains under some selling pressure for the third successive day and slides to a multi-day low, below the 0.9000 psychological mark during the Asian session on Friday. Bearish traders now await a sustained breakdown through the 100-day Simple Moving Average (SMA) before positioning for an extension of the recent pullback from a one-month peak touched earlier this week amid sustained US Dollar (USD) selling.
The incoming softer US macro data pointed to signs of weakness in the labor market and a loss of momentum in the economy at the end of the second quarter. This reaffirms market bets that the Federal Reserve (Fed) will start cutting rates in September and drags the USD Index (DXY), which tracks the Greenback against a basket of currencies, to over a three-week low, which, in turn, is seen as a key factor exerting downward pressure on the USD/CHF pair.
Apart from this, the decline could further be attributed to some repositioning trade ahead of the closely-watched US monthly employment details, due for release later during the North American session. The popularly known Nonfarm Payrolls (NFP) report will play a key role in influencing market expectations about future policy decisions, which, in turn, should drive the USD demand and determine the near-term trajectory for the USD/CHF pair.
Meanwhile, the Swiss Consumer Price Index (CPI), released on Thursday, declined to 1.3% YoY in June as compared to the 1.4% YoY expected. Furthermore, the core gauge ticked lower to the 1.1% yearly rate against the 1.2% anticipated, which could allow the Swiss National Bank (SNB) to ease further. Moreover, the SNB had shown readiness to intervene in the FX market, which should cap the Swiss Franc (CHF) and lend support to the USD/CHF pair.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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