USD/CHF softens to near 0.8150 ahead of Fed rate decision
- USD/CHF drifts lower to around 0.8160 in Wednesday’s early European session.
- Rising geopolitical risks support the Swiss Franc and create a tailwind for the pair.
- The Fed interest rate decision will be closely watched later on Wednesday.
The USD/CHF pair weakens to near 0.8160, snapping the three-day winning streak during the early European trading hours on Wednesday. The persistent geopolitical tensions in the Middle East lift the safe-haven currency like the Swiss Franc (CHF). Later on Wednesday, all eyes will be on the US Federal Reserve (Fed) interest rate decision.
Israel is set to intensify its attacks on Tehran, while the United States (US) is considering expanding its role amid rising tensions between Israel and Iran. Late Tuesday, US President Donald Trump posted on his social media platform, calling for Iran’s “unconditional surrender.” Investors are concerned that the United States will participate in the Israel-Iran conflict, which boost the safe-haven flows, benefitting the CHF.
The Fed interest rate decision will take center stage later on Wednesday, which is expected to hold policy rates unchanged in the range of 4.25%-4.50% at its June meeting. Traders will keep an eye on the press conference as it might offer some hints about the interest rate path this year.
Any dovish remarks from the Fed officials could contribute to the USD’s downside. Based on the latest US inflation data, traders now see a nearly 80% possibility of a Fed rate cut in September, followed by another one in October, according to Reuters.
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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