USD/CHF trades subduedly around 0.7920 ahead of Fed Powell’s speech
- USD/CHF trades with caution around 0.7920 ahead of Fed Powell’s speech at 16:35 GMT.
- Fed Miran supports lowering interest rates by roughly 2%.
- The SNB is expected to hold interest rates steady at 0% on Thursday.
The USD/CHF pair demonstrates a subdued performance around 0.7920 during the late Asian trading session on Tuesday. The Swiss Franc pair is expected to stay on the sidelines, with investors awaiting the speech from Federal Reserve (Fed) Chair Jerome Powell scheduled at 16:35 GMT.
Investors will pay close attention to Fed Powell’s speech to get cues about the pace of interest rate cuts by the United States (US) central bank in the remainder of the year.
On Monday, Federal Open Market Committee (FOMC) members St. Louis Fed President Alberto Musalem, Atlanta Fed President Raphael Bostic, and Cleveland Fed President Beth Hammack warned that the central bank needs to remain cautious over unwinding monetary policy restrictiveness further, citing persistent inflation risks. Out of three FOMC members, only Fed Musalem is the voting member.
On the contrary, newly appointed Fed Governor Stephen Miran signaled that interest rates should be reduced further by roughly two percentage points to offset risks to employment. Fed policy is very restrictive and poses risk to Fed's employment mandate, and I believe appropriate Fed funds rate is in mid-2% area, almost 2 percentage points below current level,” Miran said.
In Tuesday’s North American session, investors will also focus on the preliminary US S&P Global Purchasing Managers’ Index (PMI) data for September, which will be published at 13:45 GMT.
This week, the Swiss Franc (CHF) will be influenced by the Swiss National Bank’s (SNB) monetary policy announcement on Thursday, in which it is expected to hold interest rates at zero level.
Investors would look for cues about whether the SNB could push interest rates into a negative territory to heat up inflation.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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