- The USD/CHF descends to about 0.8160 in the early European session on Wednesday.
- The increase in geopolitical risks supports the Swiss Franco and creates a tail wind for the pair.
- The decision on the Fed interest rate will be observed closely later on Wednesday.
The USD/CHF pair weakens about 0.8160, breaking a three -day winning streak during the first hours of Wednesday’s European negotiation. The persistent geopolitical tensions in the Middle East raise refuge currency as the Swiss Franco (CHF). Later on Wednesday, all eyes will be put in the decision on the Federal Reserve Interest (Fed).
Israel is prepared to intensify its attacks against Tehran, while the United States (USA) is considering expanding its role in the middle of the growing tensions between Israel and Iran. Late on Tuesday, US President Donald Trump published on his social media platform, asking for the “unconditional surrender” of Iran. Investors are concerned that the United States participates in the Israel-Iran conflict, which drives safe refuge flows, benefiting the CHF.
The decision on the Fed interest rate will occupy the center of attention later on Wednesday, and is expected to keep the policy rates without changes in the range of 4.25% -4.50% at its June meeting. Traders will be attentive to the press conference, as it could offer some clues about the trajectory of interest rates this year.
Any moderate comments from Fed officials could contribute to the weakness of the USD. Based on the latest US inflation data, traders now see a possibility of almost 80% of a Fed feature cut in September, followed by another in October, according to Reuters.
Franco Swiss faqs
The Swiss Franco (CHF) is the official currency of Switzerland. It is among the ten most negotiated coins worldwide, reaching volumes that far exceed the size of the Swiss economy. Its value is determined by the general feeling of the market, the country’s economic health or the measures taken by the Swiss National Bank (SNB), among other factors. Between 2011 and 2015, the Swiss Franco was linked to the euro (EUR). The link was eliminated abruptly, which resulted in an increase of more than 20% in the value of the Franco, which caused a turbulence in the markets. Although the link is no longer in force, the fate of the Swiss Franco tends to be highly correlated with that of the euro due to the high dependence of the Swiss economy of neighboring Eurozone.
The Swiss Franco (CHF) is considered a safe shelter asset, or a currency that investors tend to buy in times in markets. This is due to the perception of Switzerland in the world: a stable economy, a strong export sector, great reserves of the Central Bank or a long -standing political position towards neutrality in global conflicts make the country’s currency a good option for investors fleeing risks. It is likely that turbulent times strengthen the value of the CHF compared to other currencies that are considered more risky to invest.
The Swiss National Bank (BNS) meets four times a year (once each quarter, less than other important central banks) to decide on monetary policy. The bank aspires to an annual inflation rate of less than 2%. When inflation exceeds the objective or it is expected that it will be overcome in the predictable future, the bank will try to control the growth of prices raising its type of reference. The highest interest rates are usually positive for the Swiss Franco (CHF), since they lead to greater returns, which makes the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken the CHF.
Macroeconomic data published in Switzerland are fundamental to evaluate the state of the economy and can affect the assessment of the Swiss Franco (CHF). The Swiss economy is stable in general terms, but any sudden change in economic growth, inflation, current account or foreign exchange reserves have the potential to trigger movements in the CHF. In general, high economic growth, low unemployment and a high level of trust are good for Chf. On the contrary, if the economic data suggests to a weakening of the impulse, the CHF is likely to depreciate.
As a small and open economy, Switzerland depends largely on the health of the neighboring economies of the Eurozone. The European Union as a whole is the main economic partner of Switzerland and a key political ally, so the stability of macroeconomic and monetary policy in the Eurozone is essential for Switzerland and, therefore, for the Swiss Franco (CHF). With such dependence, some models suggest that the correlation between the fate of the euro (EUR) and the Swiss Franco is greater than 90%, or almost perfect.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
