- USD/CHF drops to around 0.9160 in the early European session on Tuesday.
- Markets lower expectations of Fed rate cut this year following stronger-than-expected US December NFP report.
- Uncertainty and geopolitical risks could support a safe haven currency like the Swiss Franc.
The USD/CHF pair weakens to around 0.9160, breaking the five-day winning streak during the early European session on Tuesday. The pair declines due to the decline of the US Dollar (USD). However, expectations that the US Federal Reserve (Fed) will approach interest rate cuts cautiously this year could limit the pair’s decline.
Meanwhile, the US Dollar Index (DXY), which measures the USD against a basket of currencies, is currently trading near 109.55 after retreating from 110.17, its highest level since November 2022. The pair’s decline could be limited amid concerns about rising inflation and limited prospects for further Fed rate cuts. Markets are now pricing in a Fed rate cut by the end of the year, versus approximately two quarter point cuts valued at the beginning of the year.
Traders will be keeping an eye on the US December Producer Price Index (PPI), which will be released later on Tuesday. On Wednesday, December US Consumer Price Index (CPI) inflation data will be the highlight. Any upside surprise could further close the door to future easing, which could boost the dollar. Several Fed officials are also expected to speak later this week.
Investors will closely monitor developments around geopolitical tensions in the Middle East. The United States has indicated that a ceasefire agreement is “on the verge” of success, while Hamas said talks are progressing well, according to a statement issued after a meeting with the emir of Qatar. However, any sign of escalating geopolitical risks 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 Although the peg is no longer in force, the fortunes of the Swiss franc tend to be highly correlated with that of the euro due to the Swiss economy’s high dependence on the neighboring eurozone.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.
