USD/CHF refreshes weekly low near 0.8430 ahead of Fed policy announcement

USD/CHF falls to near 0.8430 as traders’ big bets on Fed large rate cuts weigh on the US Dollar.
The Fed is poised to deliver its first interest rate cut decision in more than four years.
Investors expect the SNB to cut interest rates further in its policy meeting later this month.

Sagar Dua FXStreet

The USD/CHF pair posts a fresh weekly low near 0.8430 in Wednesday’s European session. The Swiss Franc asset weakens as the US Dollar (USD) falls back after a short-lived pullback move. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declines to near 100.70.

The Greenback faces selling pressure ahead of the Federal Reserve’s (Fed) monetary policy announcement at 18:00 GMT in which the central bank is widely anticipated to cut interest rates. This would be the Fed’s first dovish decision in more than four years. However, investors will pay close attention to the interest rate cut size and the Fed’s dot plot, which shows where policymakers see Federal Fund rates heading in the short and long term.

Market participants are curious about the Fed's likely rate cut to size to understand how bad the current labor market’s health is due to the long maintenance of a restrictive monetary policy stance. According to the CME FedWatch tool, the likelihood of the Fed reducing interest rates by 50 basis points (bps) to 4.75%-5.00% has increased to 63% from 14% a week ago.

Ahead of the Fed’s policy decision, the risk appetite of investors is high. S&P 500 futures have posted decent gains in European trading hours.

Meanwhile, the Swiss Franc (CHF) performs strongly against the US Dollar despite growing speculation that the Swiss National Bank (SNB) will extend the policy-easing cycle in September’s monetary policy. The SNB is expected to deliver a third straight interest rate cut as the Swiss inflation has softened significantly. Annual Swiss Consumer Price Index (CPI) decelerated to 1.1% in August, the lowest level since March of this year.

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).

EUR/USD remains bid near 1.1650 post-US ADP

Finally some respite for the risk complex see EUR/USD partially recover from the recent steep sell-off, this time hovering around the 1.1650 zone amid decent gains in a context of renewed selling pressure on the US Dollar. However, the duration and extension of this bounce should be put to the test amid the unabated tensions in the Middle East.

GBP/USD climbs above 1.3350 on improving risk mood

GBP/USD gains traction and advances toward 1.3400 on Wednesday. Although there are no headlines pointing to a de-escalation in the Middle East conflict, the modest recovery seen in US stock index futures limit the USD's gains and help the pair hold its ground.

Gold rebounds toward $5,200 as USD retreats

Gold maintains its offered tone through European session on Wednesday and climbs to the $5,200 region. The downward correction seen in the US Dollar and the ongoing crsis in the Middle East seem to be allowing XAU/USD to preserve its recovery momentum.