USD/CHF drifts lower to near 0.8050 as traders brace for Fed rate decision
- USD/CHF softens to near 0.8055 in Wednesday’s Asian session.
- Markets expect the Fed to leave the interest rate unchanged at its July meeting.
- US economic growth is estimated to have rebounded in the second quarter.
The USD/CHF pair trades in negative territory around 0.8055 during the early European session on Wednesday. Markets turn cautious ahead of the US Federal Reserve (Fed) interest rate decision and the US tariff deadline.
The Fed is anticipated to leave interest rates unchanged at its policy meeting later on Wednesday, though it could see a rare dissent by some Fed officials in favor of lower borrowing costs. Investors are already pricing in the odds of a rate cut in September at more than 60%, according to pricing in federal funds futures contracts.
"With labor market conditions near full employment, most Fed officials want to wait and see how tariffs impact inflation," said Tom Kenny, senior international economist at ANZ in Sydney.
The Greenback edges lower after trade talks between the US and China ended without any substantive agreement. US Treasury Secretary Scott Bessent said that the US and China will continue talks over maintaining a tariff truce before the deadline in two weeks, and Trump will make the final decision on any extension. Any signs of escalating trade tensions could boost the safe-haven demand, supporting the Swiss Franc.
Traders will also keep an eye on the preliminary reading of the US Gross Domestic Product (GDP) report. The US economy is expected to grow at an annual rate of 2.4% in the second quarter (Q2), compared to a contraction of 0.5% in Q1. In case of a stronger-than-expected outcome, this could help limit the USD’s losses in the near term.
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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