USD/CHF holds position above 0.8500 due to waning likelihood of a Fed bumper rate cut

• USD/CHF gains ground as recent labor data decreased the chances of an aggressive rate cut by the Fed in November.
• CME FedWatch Tool suggests 31.4% odds of a 50 basis point Fed rate cut, down from 49.3% a week ago.
• Swiss CPI rose 0.8% YoY in September, down from both expected and August's reading of 1.1%.

USD/CHF continues its winning streak for the fourth successive session, trading around 0.8510 during the European hours on Thursday. This upside of the USD/CHF pair could be attributed to recent strong US labor data, which decreased the likelihood of the Federal Reserve (Fed) delivering another aggressive rate cut in November.

The ADP US Employment Change reported an increase of 143,000 jobs in September, exceeding the anticipated 120,000 jobs. Furthermore, annual pay increased by 4.7% year-over-year. The total number of jobs added in August was revised upward from 99,000 to 103,000. This report indicates that the labor market is in better condition than previously perceived at the start of the third quarter.

The CME FedWatch Tool indicates that markets are assigning a 65.9% probability to a 25 basis point rate cut by the Federal Reserve in November, while the likelihood of a 50 basis point cut is 31.4%, down from 49.3% a week ago.

The Swiss Franc (CHF) might have received downward pressure following weaker-than-expected inflation data released on Thursday. Switzerland's Consumer Price Index rose 0.8% year-over-year in September, down from both market expectations and August's figure of 1.1%. This is the lowest inflation rate since September 2021. Additionally, the monthly inflation rate dropped by 0.3%, exceeding forecasts of a 0.1% decline, after remaining flat in August.

The downside of the Swiss Franc (CHF) could be restrained due to safe-haven flows amid escalating Middle-East tensions. The Israeli Broadcasting Authority (IBA) reported that Israel's security cabinet has resolved to take decisive action in response to the recent Iranian attack. On Tuesday night, Iran launched more than 200 ballistic missiles and drone strikes targeting Israel.

Swiss Franc FAQs

What key factors drive the Swiss Franc?

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.

Why is the Swiss Franc considered a safe-haven currency?

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 country’s 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.

How do decisions of the Swiss National Bank impact the Swiss Franc?

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.

How does economic data influence the value of the Swiss Franc?

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.

How does the Eurozone monetary policy affect the Swiss Franc?

As a small and open economy, Switzerland is heavily dependent on the health of the neighboring Eurozone economies. The broader European Union is Switzerland’s 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.

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