USD/CHF trades vulnerably near 0.7860 ahead of Fed’s policy decision
- USD/CHF posts fresh 14-year low around 0.7860 amid firm Fed dovish speculation.
- Fed dovish bets have been prompted by US labor market risks.
- Swiss producer inflation declined for the fourth month in a row.
The USD/CHF pair trades with caution near its 14-year low around 0.7860 during the late Asian session on Wednesday. The Swiss Franc posted the 14-year low on Tuesday as the US Dollar (USD) declined sharply amid firm expectations that the Federal Reserve (Fed) will cut interest rates in its monetary policy meeting on Wednesday.
According to the CME FedWatch tool, traders have fully priced in an interest rate cut by the Fed in the meeting scheduled at 12:00 GMT.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades close to two-month low near 96.60.
Fed dovish expectations have been boosted by downside United States (US) labor market risks. The Nonfarm Payrolls (NFP) benchmark revision report showed earlier this month that employers created 919k fewer jobs than what had been anticipated earlier.
In the Fed’s monetary policy announcement, investors will also focus on interest rate projections in the near and long term, and cues about inflation and the labor market outlook. Investors would like to know whether tariffs still have potential to prompt price pressures.
In the Swiss region, cooling inflation is paving the way for interest rates sliding into the negative territory. The Producer and Import Prices for August, released on Monday, showed that inflation at the wholesale level declined for the fourth month in a row. This indicates a significant slowdown in the households’ demand. Producer and Import Prices contracted at a pace of 0.6% on a monthly basis, faster than the 0.2% decline seen in July.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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