USD/CHF drifts lower to near 0.8750, Fed rate decision looms

• USD/CHF weakens to around 0.8750 in Thursday’s early European session. 
• Investors brace for the US Fed rate decision on Thursday. 
• The safe-haven demand could lift the Swiss Franc against the Greenback. 

The USD/CHF pair softens to near 0.8750 during the early European trading hours on Thursday. Traders might prefer to wait on the sidelines ahead of the US Federal Reserve (Fed) interest rate decision on Thursday. 

The downside for the US Dollar (USD) might be limited as traders expect a Donald Trump presidency will push up inflation and reduce the pace of interest rate cuts. However, the markets might turn cautious later in the day ahead of the US Fed monetary meeting. The US central bank is widely expected to cut interest rates by 25 basis points (bps). According to the CME FedWatch tool, markets have priced in nearly a 98% possibility of a quarter-point reduction and near 70% odds of a similar-sized move in December. 

On the Swiss front, data released by the State Secretariat for Economic Affairs (SECO) on Tuesday showed that the seasonally adjusted Unemployment Rate in Switzerland arrived at 2.6% in October. The figure remained unchanged compared to September. 

The Swiss National Bank (SNB) Chairman Martin Schlegel said last week that the central bank could further cut interest rates to maintain price stability in the mid-term. Markets currently have priced in 72% odds for a 25 bps and a 28% chance for a 50 bps reduction in the December meeting.

Meanwhile, the uncertainty about the global economic outlook and the ongoing geopolitical risks might boost the safe-haven flows, benefiting the Swiss Franc (CHF). As the Middle East teeters on the verge of war, with Iran threatening to react to an Israeli attack on its territory earlier this month, there are worries that Trump's win could enable Netanyahu to hit Iran's nuclear facilities, something the Biden administration has cautioned against, per CNN. 

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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