USD/CHF strengthens to near as traders brace for US Retail Sales release

Source Fxstreet
  • USD/CHF drifts higher to near 0.9045 in Friday’s early European session. 
  • US PPI inflation dampens Fed rate cut odds. 
  • Israel said Hamas must release three hostages on Saturday, or war will resume. 

The USD/CHF pair gains ground to around 0.9045 during the early European session on Friday. The renewed US Dollar (USD) demand provides some support to the pair. However, the safe-haven flows amid the uncertainty and geopolitical risks might cap the upside of USD/CHF. 

The hotter-than-expected US Producer Price Index (PPI) reinforced expectations that the US Federal Reserve (Fed) will keep interest rates for an extended period. Additionally, Fed Chair Jerome Powell highlighted that the Fed is in no rush to cut interest rates due to continued strength in the labor market and solid economic growth.

BMO’s Scott Anderson emphasized the Fed’s growing caution regarding future rate cuts, noting that “higher-for-longer interest rates is becoming the mantra again. Traders will keep an eye on the release of US Retail Sales for January, which is due later on Friday. In case of a hotter outcome, this could further lift the USD against the Swiss Franc (CHF). 

Data released by the Swiss Federal Statistical Office on Thursday showed that Switzerland's Consumer Price Index (CPI) inflation eased to 0.4% YoY in January from 0.6% in December. This figure came in line with market expectations and registered the lowest level since April 2021. On a monthly basis, the CPI declined by 0.1%, maintaining the same pace as the previous period.

Meanwhile, the uncertainty and geopolitical concerns are likely to boost the traditional safe-haven currency like the Swiss Franc (CHF). The Israeli government stated that it plans to stick to the hostage-release timeline agreed upon in the cease-fire agreement with Hamas, but has warned that if the expected three hostages are not released on Saturday, it would return to war.

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.


 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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