Swiss Franc remains under pressure as traders await Fed interest rate decision

• USD/CHF holds near two-week highs as traders await the Fed’s interest rate announcement.
• Hawkish Fed expectations and bets on a December rate hike keep the US Dollar supported.
• The Swiss Franc remains under pressure as the SNB’s low interest rates favour carry trades.

USD/CHF consolidates modest gains on Wednesday ahead of the Federal Reserve’s (Fed) monetary policy announcement at 18:00 GMT. The pair remains on the front foot for a fourth consecutive day as traders favour higher-yielding currencies, leaving the Swiss Franc (CHF) under pressure. At the time of writing, USD/CHF trades around 0.8303, near two-week highs.

The Fed is widely expected to leave interest rates unchanged at 3.75%-4.00% following September’s 25-basis-point hike. Traders will look to the policy statement and Chair Warsh’s press conference for clues on another rate hike in December, with markets pricing in an 85% probability, according to the CME FedWatch Tool.

The US central bank is likely to maintain a hawkish stance as the Middle East energy shock threatens to keep inflation above its 2% target for longer. Oil prices have rebounded after two days of losses following a Wall Street Journal report that Washington had warned Gulf states of a possible military operation against Iran after the US midterm elections.

The US Dollar is holding firm before the announcement, with the US Dollar Index (DXY), which tracks the Greenback against six major currencies, hovering around 102.40, near two-week highs.

Strategists at Brown Brothers Harriman argue that the upcoming FOMC decision is unlikely to close the door on further tightening, with “the FOMC vote split and Fed Chair Kevin Warsh’s assessment of inflation” expected to “keep a December hike in play.” They “lean towards a 9-3 vote to hold, with Beth M. Hammack, Neel Kashkari, and Lorie K. Logan dissenting in favor of a 25bps hike, as they did in July,” underscoring persistent hawkish voices on the Committee.

Warsh is also “likely to reiterate that inflation remains too high and underlying inflation pressures have yet to improve meaningfully,” BBH adds. The bank concludes that “bottom line, robust US economic activity and rising price pressures reinforce the Fed’s hawkish bias, keeping rate differentials supportive of USD.”

On the Swiss side, the Swiss National Bank’s (SNB) policy rate remains at 0%, among the lowest in the world, leaving the Franc at a yield disadvantage and making it an attractive funding currency for carry trades. The bar for an SNB rate hike appears relatively high, as inflation remains within its 0%-2% price stability range.