USD/CHF trades around 0.8900 after pulling back from four-month highs

• USD/CHF faces challenges as the US Dollar corrects downwards amid bond market optimism.
• The robust preliminary S&P Global US PMI data have weakened the likelihood of the Fed’s aggressive rate cuts.
• Traders await the Swiss Employment Level QoQ for the third quarter due on Monday.

USD/CHF corrects downwards after hitting its four-month high of 0.8957 in the previous session, currently trading around 0.8910 during the Asian session on Monday. The US Dollar (USD) receives downward pressure due to bond market optimism following President-elect Donald Trump's selection of fund manager Scott Bessent as the US Treasury secretary, a seasoned Wall Street figure and fiscal conservative.

Meanwhile, the US Dollar Index (DXY), which tracks the US Dollar's performance against six major currencies, has eased to around 107.00 after hitting a two-year high of 108.07 on Friday. However, downside risks for the USD remain limited, as the robust preliminary S&P Global US Purchasing Managers’ Index (PMI) data have strengthened expectations that the Federal Reserve (Fed) may slow the pace of rate cuts.

Futures traders are now assigning a 50.9% probability to the Federal Reserve cutting rates by a quarter point, down from approximately 61.9% a week earlier, according to the CME FedWatch Tool. Meanwhile, Treasury yields remain buoyed by expectations that President-elect Donald Trump’s proposed policies on tariffs, immigration, and taxes could spur inflation and constrain the Fed’s capacity to reduce borrowing costs further.

The Swiss Franc (CHF) has encountered difficulties as the recent decline in inflation has led to market expectations of further interest rate cuts by the Swiss National Bank (SNB) later this year and into 2025 to counter deflationary pressures. Switzerland's annual inflation rate dropped for the third consecutive month to 0.6% in October, marking the lowest level since June 2021.

SNB Chairman Martin Schlegel reaffirmed that the central bank will continue to focus on keeping inflation low as a key pillar of its monetary policy. Schlegel stressed that maintaining inflation within the 0-2% range has been vital for the Swiss economy's strong performance in recent years.