USD/CHF drops below 0.8450 as US Dollar struggles ahead of inflation data
- USD/CHF weakens as the US Dollar retreats, likely driven by a technical correction.
- US headline CPI is expected to recover to 0.3% MoM in April, from -0.1%.
- Easing trade tensions have dampened the demand for the safe-haven Swiss Franc.
USD/CHF retreats after posting more than 2% gains in the previous session, trading around 0.8430 during the Asian hours on Tuesday. The pullback comes as the US Dollar (USD) softens, possibly due to a technical correction.
The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is trading lower near 101.50 at the time of writing. Investors are now turning their focus to the upcoming US Consumer Price Index (CPI) report for April, due later on the day. Analysts expect headline CPI to rebound to 0.3% month-over-month from -0.1%, while core CPI is also forecast to rise to 0.3% from 0.1%. Year-over-year figures for both metrics are anticipated to remain unchanged.
The earlier surge in the USD/CHF pair was driven by positive developments in US-China trade talks. Over the weekend, the two nations reached a preliminary agreement in Switzerland aimed at significantly reducing tariffs—a move seen as a potential step toward easing trade tensions. Under the agreement, the US will reduce tariffs on Chinese goods from 145% to 30%, while China will cut tariffs on US imports from 125% to 10%. The deal has boosted market sentiment and is viewed as a step toward stabilizing global trade relations.
The easing of trade tensions has encouraged a shift toward riskier assets, weighing on the safe-haven Swiss Franc (CHF). Moreover, the yield on the 10-year Swiss government bond climbed to near 0.37%, in line with a global rise in borrowing costs as investor risk appetite improved.
However, gains in Swiss yields were capped by rising expectations of further monetary easing by the Swiss National Bank (SNB). Last week, SNB Chairman Schlegel reiterated the bank’s readiness to intervene in currency markets and cut interest rates—potentially into negative territory—if inflation continues to undershoot its target.
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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