- USD/CHF weakens to around 0.8855 in the early European session on Wednesday.
- Fed officials see interest rate cuts ahead, but only gradually, FOMC Minutes showed.
- Rising geopolitical tensions in the Middle East could boost safe-haven currencies like the Swiss Franc.
The USD/CHF pair weakens near 0.8855 during the early European session on Wednesday. Weakening US Dollar (USD) ahead of US October inflation data weighs on the pair. Meanwhile, the US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, declines near the weekly low as profit-taking occurs.
Investors prefer to stay on the sidelines ahead of US PCE data due later on Wednesday. US markets will be closed for the Thanksgiving holiday on Thursday. However, strong US economic data and the cautious stance of the US Federal Reserve (Fed) are likely to limit the USD’s upside in the near term. Federal Open Market Committee (FOMC) Minutes from the November meeting released on Tuesday showed that Fed officials see interest rate cuts ahead, but at a gradual pace.
Investors lowered their expectations for a rate cut in December. Futures traders now price a 57.7% chance that the Fed will cut rates by a quarter point, down from 69.5% a month ago, according to the CME FedWatch tool.
On Tuesday, Israel approved a ceasefire agreement with Hezbollah militants in Lebanon that would end nearly 14 months of fighting linked to the war in the Gaza Strip, according to AP News. US President Joe Biden said the agreement between Israel and Hezbollah involves the withdrawal of Israeli forces from Lebanon within 60 days, with the Lebanese army taking control of areas in the south of the country to ensure that Hezbollah does not rebuild its forces.
Investors will closely monitor the development of geopolitical risks. Any sign of escalating tension could boost safe haven flows, benefiting the Swiss Franc (CHF).
Swiss Franc FAQs
The Swiss Franc (CHF) is the official currency of Switzerland. It is among the ten most traded currencies globally, reaching volumes that far exceed the size of the Swiss economy. Its value is determined by general market sentiment, the economic health of the country or measures 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 value of the franc, causing turbulence in the markets. Although the peg is no longer in force, the fortunes of the Swiss franc tend to be highly correlated with that of the euro due to the Swiss economy’s high dependence on the neighboring eurozone.
The Swiss Franc (CHF) is considered a safe haven asset, or a currency that investors tend to buy during times of market stress. This is due to the perception of Switzerland in the world: a stable economy, a strong export sector, large central bank reserves or a long-standing political stance towards neutrality in global conflicts make the country’s currency a good option for investors who shy away from risks. Turbulent times are likely to strengthen the value of CHF against other currencies that are considered riskier to invest in.
The Swiss National Bank (SNB) meets four times a year (once a 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 exceeds the target or is expected to exceed it in the foreseeable future, the bank will attempt to control price growth by raising its reference rate. Higher interest rates are usually 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 the CHF.
Macroeconomic data published in Switzerland is essential to assess the state of the economy and can affect the valuation of the Swiss Franc (CHF). The Swiss economy is broadly stable, but any sudden changes in economic growth, inflation, current account or central bank foreign exchange reserves have the potential to trigger moves in the CHF. In general, high economic growth, low unemployment and high confidence are good for the CHF. Conversely, if economic data points to weakening momentum, the CHF is likely to depreciate.
As a small, open economy, Switzerland relies heavily on the health of neighboring Eurozone economies. The European Union as a whole is Switzerland’s main economic partner 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 Franc (CHF). With such dependence, some models suggest that the correlation between the fortunes of the Euro (EUR) and the Swiss Franc 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.
