USD/CHF trades slightly higher around 0.8030 ahead of US PCE inflation data
- USD/CHF trades marginally higher around 0.8025 as the US Dollar ticks up ahead of the US PCE inflation data for July.
- Economists expect the US core PCE to have grown at a faster pace of 2.9% on year.
- The Swiss economy grew at a moderate pace of 0.1% in the second quarter of the year.
The USD/CHF pair attracts slight bids and rises to near 0.8025 during the European trading session on Friday. The Swiss Franc pair ticks up as the US Dollar (USD) trades marginally higher ahead of the United States (US) Personal Consumption Expenditure Price Index (PCE) data for July, which will be published at 12:30 GMT.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges higher to near 98.00.
Investors will pay close attention to the core PCE inflation data – which excludes volatile items such as food and energy – as it is closely tracked by Federal Open Market Committee (FOMC) members for decision-making on interest rates.
The core PCE inflation is expected to come in higher at 2.9% on an annualized basis, against 2.8% in June. On a monthly basis, the underlying inflation is estimated to have grown steadily by 0.3%. The inflation data will influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook.
Meanwhile, traders see an 85% chance that the Fed will reduce interest rates by 25 basis points (bps) to 4.00%-4.25% in the policy meeting in September, according to the CME FedWatch tool.
In the Swiss economy, the Gross Domestic Product (GDP) cooled down in the second quarter of the year, paving the way for the Swiss National Bank (SNB) to adopt an ultra-loose monetary policy. The data released on Thursday showed that the Swiss economy rose by 0.1%, as expected, slower than the 0.4% growth seen in the previous quarter.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Recommended Articles
