Swiss Franc rebounds as markets await US PCE data and monitor Lebanon-Israel tensions
- USD/CHF softens to near 0.8110 in Thursday’s early European session.
- Traders await the US PCE data, which is due later on Thursday, for further cues on monetary policy.
- Israel said the IDF will stay in southern Lebanon despite US pressure.
The USD/CHF pair edges lower to around 0.8110, retreating from an 11-month high during the early European trading hours on Thursday. Markets might turn cautious later in the day ahead of the US Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge, report for May, which might offer some hints about the US interest rate path.
Traders have ramped up bets of a US rate hike after a surprisingly hawkish-sounding debut from Kevin Warsh as Federal Reserve (Fed) chair last week. Markets expect three Fed rate hikes this year and are pricing in about 66.4% probability of a September increase, according to the CME FedWatch Tool.
Market participants will closely monitor the Middle East as Lebanon and Israel discuss a US-backed proposal for Israeli forces to transfer some of the Lebanese territory invaded in their war with Hezbollah to Lebanon’s military.
The Israeli defence minister, Israel Katz, said on Thursday that the Israeli military would not withdraw from southern Lebanon despite pressure from the US, as fighting in Lebanon continues to be an obstacle to permanent peace, per the Guardian. Any signs of rising tensions in the Middle East could boost a safe-haven currency such as the Swiss Franc (CHF) against the Greenback.
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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