USD/CHF trades around 0.9050 after pulling back from seven-month highs

USD/CHF retreats from its seven-month high at 0.9080, marked on Tuesday.
US weekly Initial Jobless Claims and S&P Global Manufacturing PMI for December will be eyed on Thursday.
The safe-haven Swiss Franc receives support from escalating geopolitical tensions.

The USD/CHF pair continues to decline from its seven-month high of 0.9080, as the US Dollar Index (DXY) hovers near 108.30 after retreating from a multi-year high of 108.58 reached on Tuesday. During European trading hours on Thursday, the USD/CHF pair trades around 0.9050.

Traders will likely observe the US weekly Initial Jobless Claims and S&P Global Manufacturing PMI for December, scheduled to be released later in the North American session.

However, the downside of the US Dollar could be limited by growing expectations that the US Federal Reserve (Fed) will adopt a slow and cautious approach to further rate cuts in 2025. During its final monetary policy meeting of 2024 on December 18, the Fed signaled plans to reduce interest rates only twice in 2025, a significant decrease from the four rate cuts projected in September’s updated economic outlook.

The Swiss Franc (CHF), a traditional safe-haven currency, gains support amid escalating geopolitical tensions in the Middle East and the ongoing Russia-Ukraine conflict.

According to Reuters, Russia launched a drone strike on Ukraine's capital, Kyiv, early Wednesday on New Year's Day, causing two fatalities, injuring at least six people, and damaging buildings in two districts. Explosions echoed across the morning as Ukraine's air force warned of incoming drones.

Meanwhile, in northern Gaza, the Israeli military intensified operations, targeting a suburb of Gaza City on Wednesday. Airstrikes in Shejaia killed at least eight Palestinians, according to local medics. The Israeli military has not issued a statement, and the identities of those killed remain unconfirmed.

Earlier this week, the KOF Leading Economic Indicator dropped by 3.4 points in December, falling to 99.5 from a revised 102.9 in November and missing market expectations of 101.1. This decline signals a potential slowdown in Switzerland’s economic outlook.

Looking ahead, the focus will shift to the SVME Purchasing Managers' Index (PMI) for December, which is scheduled for release on Friday.

Swiss Franc FAQs

What key factors drive the Swiss Franc?

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.

Why is the Swiss Franc considered a safe-haven currency?

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.

How do decisions of the Swiss National Bank impact the Swiss Franc?

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.

How does economic data influence the value of the Swiss Franc?

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.

How does the Eurozone monetary policy affect the Swiss Franc?

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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