USD/CHF weakens below 0.9000 ahead of US PPI data

USD/CHF trades in negative territory near 0.8960 for the second consecutive day on Friday.
Traders raised their bets on Fed rate cuts in September after the softer-than-expected June US CPI inflation report.
The speculation that the SNB will cut further interest rates might cap the pair’s downside.

The USD/CHF pair trades on a weaker note around 0.8960 during the early European session on Friday. The downtick of the pair is backed by the softer US Dollar (USD) after US consumer prices unexpectedly fell in June. Investors will take more cues from the US June Producer Price Index (PPI) and the preliminary July Michigan Consumer Sentiment gauge for fresh impetus, which is due later on Friday.

The US CPI dropped 0.1% MoM in June after being unchanged in May, according to the Bureau of Labor Statistics on Thursday. This figure registered the lowest monthly reading since May 2020. Meanwhile, the annual CPI rose 3% YoY in the same report period, the lowest reading in a year. The softer inflation reading spurred the expectation that the Federal Reserve (Fed) would cut the interest rate in the coming months.

Chicago Fed President Austan Goolsbee said early Friday that the latest inflation data was “excellent,” adding that the reports provided proof that the Fed is on track to meet its 2% target. Meanwhile, St Louis Fed President Alberto Musalem marked "encouraging further progress" toward the Fed inflation target. San Francisco Fed President Mary Daly noted that the cooling of price pressures bolsters the case for cutting rates, even if the timing remains a matter for debate. The Greenback edges lower amid the growing speculation of a Fed rate cut this year, with traders seeing a nearly 85% chance of easing in September, according to CME Group’s FedWatch Tool.

On the Swiss front, geopolitical tensions, political uncertainty in the US and Europe, and concerns about the global economic slowdown might boost safe-haven assets like the Swiss Franc (CHF). However, the speculation that the Swiss National Bank (SNB) will cut further interest rates might exert some selling pressure on the CHF.

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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