USD/CHF holds positive ground above 0.8950, Fed Powell’s testimony eyed

July 9, 2024 8:03 am

  • USD/CHF trades on a stronger note near 0.8980 in Tuesday’s early European session. 
  • The US Dollar edges lower due to a potential September rate cut from the Fed.  
  • Political uncertainties both within Europe and globally, might support the CHF. 

The USD/CHF pair trades in positive territory for the second consecutive day around 0.8980 on Tuesday during the early European session. Meanwhile, the USD Index (DXY) consolidates near the 105.00 level ahead of Federal Reserve (Fed) Chair Jerome Powell’s semi-annual monetary policy testimony on Tuesday. 

The rising expectation that the US Fed will start cutting the interest rate earlier than previously expected has dragged the Greenback lower. Fed Powell’s testimony might offer some hints about whether the possibility of a September rate cut has improved with the latest data. If Powell delivers hawkish comments, this might provide some support for the US Dollar (USD). Financial markets are now pricing in a nearly 76% chance of a Fed rate cut in September, up from 71% last Friday, according to the CME FedWatch tool. 

Market players will shift their attention to the US Consumer Price Index, which is due on Thursday. The US CPI is estimated to show an increase of 3.1% YoY in June, compared to a 3.3% rise in May. Core inflation is projected to remain steady at 3.4% YoY in June. 

On the Swiss front, political uncertainties in both within Europe and globally might boost a safe-haven currency like the Swiss Franc (CHF). However, the cooler inflationary pressures in Switzerland could prompt the Swiss National Bank (SNB) to continue cutting interest rates further. This, in turn, is likely to weigh on the CHF and create a tailwind for USD/CHF in the near term. 

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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