USD/CHF climbs as shifting Fed outlook supports the Greenback
- USD/CHF advances on Wednesday as the US Dollar gains traction amid shifting Fed rate cut expectations.
- Traders now see July as the more likely timing for the next Fed interest rate cut.
- The Swiss Franc remains under pressure despite an uptick in economic sentiment.
USD/CHF edges higher on Wednesday, drawing support from a firmer US Dollar, which is exerting pressure on the Swiss Franc (CHF). At the time of writing, the pair is trading around 0.7746, after bouncing off an intraday low of 0.7719.
The Greenback is showing signs of resilience as traders reassess the Federal Reserve’s (Fed) monetary policy path and scale back expectations for near-term interest rate cuts, with policymakers remaining concerned about sticky inflation pressure.
Chicago Fed President Austan Goolsbee said on Tuesday that he is cautious about front-loading rate cuts without clear evidence that inflation is moving sustainably back toward the 2% target.
Markets widely expect the Fed to keep interest rates unchanged at the March and April meetings, though traders still price in nearly 50 basis points (bps) of easing by year-end.
A June rate cut, previously seen as the most likely timing for the Fed to resume easing, now appears less certain. According to the CME FedWatch Tool, the probability of a June cut has fallen to around 40% from roughly 50% a week ago. July is now viewed as the more likely window for the next rate reduction, with markets currently assigning around a 65% chance.
The shift in expectations is lending near-term support to the US Dollar. However, the Greenback’s upside could remain limited amid lingering structural headwinds tied to US President Donald Trump’s aggressive trade agenda and growing concerns over policy credibility and fiscal stability.
In Switzerland, economic sentiment improved in February, with the ZEW Survey – Expectations index rising to 9.8 from -4.7 in the previous month, but the data offered little support to the Swiss Franc.
Speaking on Tuesday, Swiss National Bank (SNB) Chairman Martin Schlegel said, “It’s possible there will be a few months with negative inflation, but that’s not an alarm signal as we look at inflation over the mid-term.” He added, “I expect inflation to accelerate in the coming quarters,” and reiterated that “the SNB is ready to intervene on currency markets where necessary.”
Looking ahead, there are no key US releases on Wednesday, as traders look ahead to comments from Fed officials in the American session. Attention will then turn to the US Producer Price Index (PPI) data and Switzerland’s fourth-quarter Gross Domestic Product (GDP) report, both due on Friday.
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.