Swiss Franc dips to fresh four-month lows as SNB leaves interest rates at 0%

• USD/CHF reverses early losses and jumps to fresh four-week highs near 0.8280.
• The Swiss Franc extended losses as the SNB left interest rates unchanged at 0%, as widely expected.
• SNB-Fed monetary policy divergence is crushing the Swiss Franc.

The Swiss Franc (CHF) has given back previous gains against the US Dollar (USD) on Thursday, and fell to fresh four-month lows following the Swiss National Bank’s (SNB) monetary policy decision. The USD/CHF pair bounced up to 0.8269, its highest level since late May, from session lows just below 0.8530.

The SNB has left its benchmark interest rate unchanged at 0%, as widely expected, with the monetary policy statement highlighting that inflation accelerated in August, driven by higher Oil prices, and that, according to their forecasts, it will continue rising over the coming months, before declining in 2027.

The bank acknowledged that the second quarter's Swiss Gross Domestic Product (GDP) was "exceptionally strong" but warned that economic growth will remain at moderate levels over the coming quarters, amid the highly uncertain scenario and the high inflationary pressures. This practically discards any monetary tightening in the near term

SNB-Fed monetary divergence is crushing the Swissie

In the US, on the contrary, recent data has boosted expectations that the Federal Reserve (Fed) will be forced to tighten its monetary policy at least once before the year-end.

Preliminary US S&P Global Purchasing Managers' Index (PMI) figures released on Wednesday revealed that business activity accelerated to its fastest pace in five years in September, with employment and wages rising sharply, while input costs continue growing amid high energy prices. 

Futures markets are pricing a nearly 70% chance of a 25% rate hike in October, up from 55% before the release of US PMI data, and nearly fully pricing in at least one more rate hike before the year-end, according to figures released by the CME FedWatch Tool. Unless the SNB changes its rhetoric radically, this is likely to fuel a steady US Dollar uptrend in the coming months.

These figures have raised concerns that the US economy is overheating, which poses additional pressure on the Fed to hike interest rates. Fed Governor Michael Barr confirmed those views, assessing that “further rate hikes are likely needed to ensure timely return to the 2% inflation.”