USD/CHF consolidates around 0.9150 with Trump’s return taking center stage

  • USD/CHF hovers around 0.9150 as investors remain cautious ahead of Trump’s inauguration.
  • Trump’s economic policies are expected to boost inflation and growth in the US.
  • The SNB is expected to continue reducing interest rates this year.

The USD/CHF pair is trading sideways within Friday’s trading range around 0.9140 in the European session on Monday. The Swiss Franc pair is consolidating as investors have stayed on the sidelines ahead of the inauguration ceremony of United States (US) President-elect Donald Trump.

Market participants are expecting an unprecedented global trading environment under the Trump administration as he is expected to sign more than 200 orders soon after returning to the White House. His initial orders could include immigration controls, higher tariffs and lower individual taxes. Higher import tariffs are expected to lead to a global trade war, a scenario that will boost demand for goods and services produced in the US while, at the same time, making offers from other economies more expensive.

Trump’s economic policies would be pro-growth and inflationary for the United States (US) economy and favorable for the US Dollar (USD). At the time of writing, the US Dollar Index (DXY), which tracks the value of the Dollar against six major currencies, is down near 109.00 but is still up 10% in just over three months.

Going forward, Trump’s policies are expected to force the Federal Reserve (Fed) to keep interest rates elevated for a longer period. According to the CME’s FedWatch tool, traders are pricing in more than a 25 basis point interest rate cut this year, seeing the first at the June meeting.

Meanwhile, the Swiss Franc (CHF) remains broadly weak as investors hope that the Swiss National Bank (SNB) can continue to reduce interest rates. Swiss interest rates have already dropped to 0.5% amid growing risks that inflation will fall short of the central bank’s target.

US Dollar FAQs

The United States Dollar (USD) is the official currency of the United States of America, and the “de facto” currency of a significant number of other countries where it is in circulation alongside local banknotes. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions. After World War II, the USD took over from the pound sterling as the world’s reserve currency.

The single most important factor influencing the value of the US Dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: achieve price stability (control inflation) and promote full employment. Your main tool to achieve these two objectives is to adjust interest rates. When prices rise too quickly and inflation exceeds the 2% target set by the Fed, the Fed raises rates, which favors the price of the dollar. When Inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the Dollar.

In extreme situations, the Federal Reserve can also print more dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a clogged financial system. This is an unconventional policy measure used when credit has dried up because banks do not lend to each other (for fear of counterparty default). It is a last resort when a simple lowering of interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE usually leads to a weakening of the US Dollar.

Quantitative tightening (QT) is the reverse process by which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal of maturing portfolio securities in new purchases. It is usually positive for the US dollar.

Source: Fx Street

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