EUR/CHF extends advance as soft Swiss inflation revives rate-cut bets
- EUR/CHF extends gains for a second day as softer Swiss inflation pressures the Franc.
- Swiss CPI slows to 0.1% YoY in October, the lowest since June, reinforcing disinflation concerns.
- Eurozone factory activity stabilizes, with the HCOB PMI confirmed at 50.0, offering mild support to the Euro.
The Euro (EUR) strengthens against the Swiss Franc (CHF) on Monday, as the Franc weakens broadly after Swiss inflation unexpectedly cooled in October. At the time of writing, EUR/CHF is trading around 0.9298, extending gains for the second consecutive day.
The latest figures from the Swiss Federal Statistical Office showed that the Consumer Price Index (CPI) fell 0.3% MoM in October, steeper than the 0.1% decline expected and following a 0.2% drop in September. On a yearly basis, the CPI rose 0.1%, easing from 0.2% in September and missing the market forecast of 0.3%.
The softer-than-expected inflation data, hovering near the lower end of the Swiss National Bank (SNB) 0-2% target range, fueled speculation that the central bank may consider returning to negative interest rates to counter persistent disinflationary pressures. The data challenge the SNB’s forecast that inflation will gradually pick up later this year and into 2026, with the central bank projecting an average rate of 0.4% for the current quarter.
According to the latest BHH MarketView report, swaps pricing now assigns a 70% probability of a 25-basis-point cut to -0.25% within the next twelve months, up from 50% previously.
The SNB kept its policy rate unchanged at 0.00% at its September meeting. Earlier in October, SNB Chair Martin Schlegel said the central bank would “observe the situation and adjust monetary policy where necessary,” signaling a cautious stance and a reluctance to consider further easing for now. However, Governing Board member Petra Tschudin recently indicated that the SNB remains ready to reintroduce negative interest rates if economic conditions deteriorate, noting that such measures have proven effective in the past.
The latest data also showed that Switzerland’s SVME Purchasing Managers’ Index (PMI) improved to 48.2 in October from 46.3 in September, beating expectations of 47.5. The slight improvement signals easing contraction, though US tariffs and weak external demand continue to weigh on the sector.
In the Eurozone, the HCOB Manufacturing PMI was confirmed at 50.0 in October, up from 49.8 in September, marking a return to modest growth in factory activity. The improvement offered a mild boost to sentiment toward the Euro and lent additional support to EUR/CHF.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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