USD/CHF flattens around 0.8050 as investors await Fed’s policy outcome
- USD/CHF consolidates around 0.8050 ahead of Fed’s monetary policy announcement.
- Investors expect the Fed to cut interest rates and refrain from endorsing a dovish outlook.
- The SNB is unlikely to push interest rates into a negative territory in the policy meeting on Thursday.
The USD/CHF pair trades flat around 0.8060 during the late Asian trading session on Wednesday. The Swiss Franc pair consolidates as investors await the monetary policy announcement by the Federal Reserve (Fed), which is scheduled at 19:00 GMT.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat around 99.20.
The US Dollar struggles to get direction as investors are uncertain over the United States (US) interest rate outlook, while remaining confident that there will be an interest rate cut in Wednesday’s meeting. Market participants doubt that the Fed will take a dovish stance on the monetary policy outlook as inflationary pressures remain well above the 2% target.
According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points (bps) to 3.50%-3.75% in the December policy meeting is 87.6%. This will be the third interest rate cut by the Fed in a row.
Going forward, the Swiss Franc (CHF) will also be influenced by the Swiss National Bank’s (SNB) monetary policy announcement on Thursday. The SNB is expected to keep interest rates steady at 0%, and not pushing them into the negative territory, even as the Consumer Price Index (CPI) remained flat on an annualized basis in November.
SNB Chairman Martin Schlegel stated in his recent commentary that the bar to push interest rates into the negative zone is high due to "undesirable side effects" on savers and pension funds.
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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