Swiss Franc retreats further despite bright KOF Leading Indicators data

• USD/CHF rallies to fresh session highs above 0.8170 despite bright Swiss KOF Leading Indicators data.
• The Swiss Economic Barometer improved unexpectedly in July, boosting confidence about economic growth.
• The US Dollar is regaining lost ground following investors' disappointment about the lack of guidance by the Fed.

The Swiss Franc (CHF) remains on the defensive against the US Dollar (USD) Thursday despite the unexpected improvement of Swiss leading indicators. The USD/CHF keeps reversing some of the ground lost on Wednesday, as the risk-off mood amid escalating tensions in the Middle East are offsetting the negative impact from the lack of guidance at Federal Reserve Chairman Kevin Warsh's press conference disappointed investors.

The Economic Barometer, released by the Swiss KOF Economic Institute earlier on Thursday, improved for the second consecutive month in July, to 103.5 from the upwardly revised 102.1 reading seen in June, against market expectations of a decline to 101.0.

The KOF institute points to improvements in the production indicators as the main contributors to July’s improvement, with all economic sectors showing positive readings. On the demand side, the report affirms that foreign demand and private consumption remain practically unchanged.

Fed pause rattles long-end Treasuries as Dollar outlook darkens

The pair retreated on Wednesday amid broad-based US Dollar weakness following the Federal Open Market Committee’s (FOMC) meeting. The Fed left interest rates unchanged, with three committee members voting for a quarter-point rate hike and Chairman Kevin Warsh refused to give any forward guidance.

Analysts at MUFG note that “the long-end of the US Treasury bond market sold off last night,” dragging the Dollar lower after Fed Chair Warsh “spoke in detail for around 45mins but without providing any clear explanation as to why the FOMC decided to keep the key policy rate unchanged.” In their view, “Fed credibility is being questioned today,” and, following “a big jump in inflation expectations,” they warn that “the US dollar outlook has certainly worsened.”

Warsh's press release made investors wary that the central bank might be failing to do its job with consumer inflation levels well above target, which revived doubts about the central bank’s independence and triggered some dovish repricing of near-term rate hikes. Futures markets are now pricing a 34% chance that the Fed will leave rates unchanged in September, up from 24% before Wednesday’s meeting and 17% one week ago.