USD/CHF softens to near 0.7750 ahead of US CPI inflation release
- USD/CHF weakens to around 0.7765 in Wednesday’s early European session.
- Demand for the Swiss Franc remains high due to ongoing Middle East tensions.
- The US February CPI inflation report will be closely watched on Wednesday.
The USD/CHF pair loses ground to near 0.7765 during the early European trading hours on Wednesday. Ongoing Middle East tensions continue to boost a safe-haven currency such as the Swiss Franc (CHF) against the US Dollar (USD). All eyes will be on the US February Consumer Price Index (CPI) inflation report later on Wednesday.
The Ministry of Defense of the State of Qatar said on Wednesday that armed forces intercepted a missile attack that targeted the country, per Reuters. The statement came as Iran continues to target its neighboring countries and US assets in the region amid the ongoing US and Israeli campaign against the Islamic regime in Tehran.
Signs of escalating tensions and a prolonged war in the Middle East could provide some support to the CHF and act as a headwind for the pair in the near term. However, positive developments surrounding potential resolution in the Iran conflict could reduce the "war premium," capping the upside for the Swiss Franc.
Traders will closely monitor the upcoming US inflation data on Wednesday to gauge future Federal Reserve (Fed) interest rate moves. Markets expect to see headline CPI increase by 2.4% YoY in February, while core CPI, which excludes the often-volatile food and energy categories, is projected to show a rise of 2.5% during the same period. In case of hotter-than-expected inflation data, this could lift the USD against the CHF.
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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