Swiss Franc holds gains against US Dollar as Middle East tensions outweigh upbeat US data

• The Swiss Franc remains supported by rising geopolitical tensions in the Middle East despite stronger US consumer confidence.
• The University of Michigan Consumer Sentiment Index improved more than expected in July, while one-year inflation expectations eased.
• Markets continue to price in a cautious Federal Reserve outlook following softer US inflation data earlier this week.

USD/CHF trades around 0.8070 at the time of writing on Friday, down 0.22% on the day. The pair remains under pressure as safe-haven demand for the Swiss Franc (CHF) offsets modest support for the US Dollar (USD) following stronger-than-expected US consumer sentiment data.

The preliminary University of Michigan Consumer Sentiment Index rose to 54.4 in July from 49.5 in June, exceeding market expectations. The Current Conditions Index climbed to 54.9 from 47.7, while the Expectations Index improved to 54 from 50.7, pointing to improving confidence among US households. Inflation expectations were mixed, with the one-year outlook easing to 4.2% from 4.6%, while the five-year forecast remained unchanged at 3.3%, reinforcing signs that price pressures are gradually moderating. Following the release, the US Dollar Index (DXY) remained modestly supported around 100.80 after Thursday's rebound.

However, the Greenback continues to face headwinds after this week's softer-than-expected US Consumer Price Index (CPI) and an unexpected decline in the Producer Price Index (PPI). These data have led markets to rule out a near-term interest rate hike by the Federal Reserve (Fed), although expectations remain divided over the possibility of a move in September.

Meanwhile, geopolitical tensions continue to support the Swiss Franc. Reuters reported that Iran has instructed Yemen's Houthi rebels to prepare to close the strategic Red Sea Oil route if the United States (US) attacks Iranian infrastructure. The Tasnim news agency also reported explosions in Bandar Abbas, Qeshm and Ahvaz, while additional blasts were heard in Kuwait and as far away as Basra. At the same time, Iran's Islamic Revolutionary Guard Corps warned of further retaliation against the United States and countries hosting US military bases, maintaining demand for traditional safe-haven assets.

In Switzerland, the Swiss National Bank (SNB) kept its policy rate unchanged at 0% during its June meeting while acknowledging that geopolitical tensions had increased near-term inflation risks. Nevertheless, OCBC analysts believe the Swiss Franc's upside remains constrained, arguing that the SNB's willingness to intervene in the foreign exchange market continues to limit the currency's safe-haven appeal. According to the bank, Switzerland's low interest rate environment should continue to weigh on the Swiss Franc despite the worsening geopolitical backdrop.