Swiss Franc gains despite fading SNB rate hike odds
- USD/CHF struggles as the Swiss Franc strengthened despite cooling SNB rate hike expectations.
- Traders expect the Swiss National Bank to hold its key interest rate at 0% through the end of the year.
- The CHF gains against the USD amid US-Iran peace uncertainty.
USD/CHF remains subdued for the second successive day, trading around 0.7890 during the Asian hours on Friday. The Swiss Franc (CHF) strengthened despite softer-than-expected inflation data, which cooled market anticipation of an upcoming Swiss National Bank (SNB) rate hike. May's annual inflation held steady at 0.6%, marking its highest level since late 2024 but missing the 0.8% consensus forecast.
SNB Chairman Martin Schlegel noted that medium-term price pressures remain largely unchanged despite recent short-term upticks. Consequently, investors have adjusted their outlook, now widely expecting the central bank to keep its key interest rate anchored at 0% through the end of the year.
The safe-haven demand supports the Swiss Franc against the US Dollar (USD), which could be attributed to a complex web of developments surrounding a potential US-Iran peace agreement to end recent hostilities. Tensions remain highly elevated following warnings from Iranian Foreign Minister Abbas Araghchi, who declared that the strategic Strait of Hormuz falls within Iranian and Omani territorial waters and asserted that US regional military bases are active targets for retaliation.
Market participants are now awaiting the upcoming US Nonfarm Payrolls (NFP) report for fresh direction. Present projections indicate that the US economy added 85,000 jobs in May, with the unemployment rate expected to hold steady at 4.3%.
Any positive surprises or signs of further labor market strength could prompt traders to bet that the Federal Reserve (Fed) will maintain interest rates higher for longer. Markets are now pricing in nearly a 42% chance of a Fed rate hike in December, according to the CME FedWatch Tool.
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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