Swiss Franc strengthens as US Dollar holds losses despite Fed rate hike odds

USD/CHF loses ground for the third consecutive day, trading around 0.8090 during the Asian hours on Wednesday. The pair remains subdued as the US Dollar (USD) holds losses despite a hawkish tone surrounding the Federal Reserve (Fed) policy outlook.

According to the CME FedWatch Tool, traders are currently pricing in about a 60% chance of an interest rate hike at the US central bank's upcoming policy meeting. Looking ahead, the US Producer Price Index (PPI) and Consumer Price Index (CPI) inflation data will take center stage later this week. These crucial readings may shed fresh light on the Federal Reserve's next steps ahead of the September meeting.

Moreover, rising oil prices intensify inflation concerns and strengthen expectations for a Federal Reserve (Fed) rate hike. Crude oil prices have climbed following a US strike on several Iranian tankers near Kharg Island, a major export hub. These attacks have heightened geopolitical tensions and stoked market concerns regarding potential disruptions to global oil supplies.

Swiss inflation doubled in August as persistent Middle East tensions heightened global energy prices and stoked inflationary concerns. However, this spike is expected to be temporary, as electricity prices are projected to drop by about 4% next year, which will likely weigh on inflation in the months ahead.

Strategists at UOB Group maintain a neutral medium-term stance on USD/CHF, reiterating that, over the next one to three weeks, they “continue to hold the same view as yesterday (07 Sep, spot at 0.8100).” For now, UOB expects the Dollar to remain directionless, with the pair “trading in a range between 0.8055 and 0.8155,” underscoring an ongoing consolidation phase rather than a decisive trend move.

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 countrys 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 Switzerlands 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.