USD/CHF holds steady above 0.9100 as cooling US inflation keeps Fed on track for rate cuts
- USD/CHF flat lines near 0.9125 in Thursday’s early European session.
- Softer US CPI inflation sparks speculation about future Fed rate cuts.
- The uncertainties and geopolitical risks could boost the safe-haven currency like the CHF.
The USD/CHF pair trades on a flat note around 0.9125 during the early European trading hours on Thursday. The Greenback struggles to gain ground after cooler US inflation data heightens the expectations of potential Federal Reserve (Fed) rate cuts. Traders await the US December Retail Sales and weekly Initial Jobless Claims, which will be published later on Thursday.
The Bureau of Labor Statistics revealed on Thursday that the US Consumer Price Index (CPI) climbed 2.9% YoY in December versus 2.7% prior. This reading was in line with forecasts. Meanwhile, the US core CPI, which excludes volatile food and energy prices, rose 3.2% YoY in December, slightly softer than the 3.3% expected.
Futures pricing continued to imply a near certainty that the Fed would hold the interest rate steady at its January 28-29 meeting but priced in a nearly 50% chance of two rate cuts through the year, according to the CME FedWatch tool. The markets anticipate the next reductions likely will happen in May or June.
Israel and Hamas have agreed to a deal that will pause the war in Gaza following 15 months of war. The agreement would come into effect on Sunday so long as it was approved by the Israeli cabinet, per CNN. Investors will closely monitor the development surrounding the geopolitical risks. Any signs of escalating tensions in the Middle East could boost the safe-haven flows, benefiting the Swiss Franc (CHF).
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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