Swiss Franc weakens as US Dollar gains on Fed rate hike odds

• US Dollar Index strengthens as markets price in an 87% probability of a quarter-point rate hike following strong inflation data.
• The Swiss Franc struggles due to potential for US-Swiss interest rate gap widening.
• Yen carry-trade shifts increase selling pressure on the Swiss franc while the SNB's unchanged 0% rate.

USD/CHF extends its winning streak for the fourth consecutive day, trading around 0.8180 during Asian hours on Monday. The pair appreciates as the US Dollar (USD) gains support amid aggressive Federal Reserve (Fed) rate-hike bets for Wednesday’s decision following hotter US inflation reports. Financial markets have priced in nearly an 87% probability of a quarter-point rate hike at the Fed's September meeting, up from 59% a week ago, according to the CME FedWatch tool.

The US Consumer Price Index (CPI) accelerated in August, reinforcing expectations that the US central bank will raise interest rates next week. Data released by the Bureau of Labor Statistics on Friday showed that the US CPI rose 0.4% MoM in August, putting the 12-month increase at 3.4%. Both readings came in line with market expectations. Meanwhile, the core CPI, which excludes volatile food and energy prices, increased by 0.3% on a monthly basis, versus 0.2% prior, beating the forecast of 0.2%.

Moreover, the USD/CHF pair depreciates as the Swiss Franc (CHF) struggles amid a potentially widening interest rate differential with the United States (US), ahead of the Federal Reserve's policy decision later this week.

Meanwhile, the Swiss Franc faces selling pressure stemming from a new wave of yen-carry-trades. A hawkish sentiment from the Bank of Japan (BoJ) and joint yen-buying interventions by Washington and Tokyo have reduced the appeal of the Japanese Yen as a funding currency, pushing traders to shift their positions to alternative safe-haven currencies like the CHF.

This sudden swing creates downward pressure on the Swiss Franc as investors sell their franc-funded loans to buy higher-yielding assets elsewhere. Meanwhile, contrasting with the policies of other major global central banks, the Swiss National Bank (SNB) is widely expected to leave its key policy rate unchanged at 0% through year-end, maintaining the lowest rate among major economies.

USD/CHF upside momentum builds as range top comes into focus

Strategists at UOB Group note that their previously neutral stance on USD/CHF is starting to tilt higher as the pair tests the top of its recent range. They recall that on September 7, with the spot at 0.8100, they had highlighted that “for the time being, we expect USD to trade in a range between 0.8055 and 0.8155.” By September 10, with spot still around 0.8100, this was refined to “we continue to expect range-trading, but a narrower range of 0.8060/0.8135 is likely enough to contain the price movements in USD for now.”

However, UOB points out that USD/CHF subsequently “rose to a high of 0.8147,” and that “upward momentum is starting to build.” In their one-to-three-week view, they now judge that “if USD breaks and closes above 0.8155, it could continue to rise toward 0.8175.” They add that “the odds of USD breaking clearly above 0.8155 will remain intact as long as USD holds above the ‘strong support’ level, now at 0.8085.”