USD/CHF posts mild gains above 0.8000 as US CPI inflation data in line
- USD/CHF trades with mild gains near 0.8010 in Wednesday’s early European session.
- US CPI inflation report supports the case that the Fed will hold rates steady later this month.
- Concerns over the Fed’s independence and geopolitical tensions could boost the safe-haven flows, supporting the Swiss Franc.
The USD/CHF pair posts modest gains around 0.8010 during the early European session on Wednesday. The Greenback strengthens against the Swiss Franc (CHF) after US inflation data that was broadly in line with estimates. The release of the US Retail Sales and Producer Price Index (PPI) reports will be in the spotlight later on Wednesday.
Data released by the US Bureau of Labor Statistics (BLS) on Tuesday showed that the US Consumer Price Index (CPI) rose 2.7% YoY in December. This figure followed 2.7% in November and matched the forecast. Meanwhile, core CPI, which excludes the so-called more volatile food and energy components, increased by 2.6% in December, versus a 2.7% prior rise. On a monthly basis, the headline and core CPI rose by 0.3% and 0.2%, respectively.
The US CPI inflation reports firm expectations that the US Federal Reserve (Fed) will remain on hold later this month despite unprecedented pressure from the White House to lower interest rates. This, in turn, lifts the US Dollar (USD) against the CHF. Fed funds futures traders' pricing showed that an interest rate cut is not seen as likely until June.
On the other hand, Fed uncertainty and geopolitical risks could boost traditional safe-haven currencies such as the CHF. US President Donald Trump on Sunday threatened Fed Chair Jerome Powell with a criminal indictment. Elsewhere, the Iranian government has cracked down on large-scale demonstrations, with hundreds of people reportedly dead. Trump has repeatedly threatened to intervene if the Islamic Republic kills protesters.
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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