USD/CHF gathers strength above 0.8950 ahead of US Retail Sales release

• USD/CHF gains momentum to near 0.8955 in Tuesday’s early European session, adding 0.16% on the day. 
• The Fed is expected to cut interest rates by a quarter of a percentage point at the December meeting on Wednesday. 
• Geopolitical risks could boost the safe-haven currency like the Swiss Franc and cap the upside for the pair. 

The USD/CHF pair extends its upside to around 0.8955 during the early European session on Tuesday, bolstered by the renewed US Dollar (USD) demand. The Swiss National Bank (SNB) Quarterly Bulletin for the fourth quarter will be released on Wednesday. Also, the Federal Reserve (Fed) monetary policy meeting will take center stage on the same day. 

Investors expect the Fed will cut the interest rates by 25 basis points (bps) in December, with markets pricing in a 95.4% possibility of that outcome as of Tuesday, according to the CME FedWatch Tool. That would bring the target federal funds rate down to a range of 4.25%-4.50% from its current range of between 4.50% and 4.75%. 

The Fed Press Conference and a Summary of Economic Projections, or ‘dot-plot,’ will be closely monitored as the markets brace for the US central bank to scale back its easing in 2025 in anticipation of higher inflation under the Trump administration. The hawkish cut by the Fed could provide some support to the Greenback against the Swiss Franc (CHF) in the near term. 

“Expectations of stubborn inflation amid an otherwise robust economy will boost the likelihood that interest rates stay higher for longer, either through an extended pause in rate cuts or a much slower, more deliberate pace in 2025,” Bankrate Chief Financial Analyst Greg McBride said.

On the Swiss front, data released by the Federal Statistical Office (FSO) showed on Monday that Switzerland’s Producer and Import Price Index fell by 0.6% MoM in November, compared to the previous month's 0.3% decline. The reading came in softer than a rise of 0.2% expected. 

Meanwhile, the ongoing geopolitical tensions in the Middle East could boost the safe-haven flows, benefiting the CHF. Turkey denounced Israel’s plan to double Israeli settlement in the occupied Golan Heights, raising concerns over Israel’s actions in Syria since the fall of the Assad regime.

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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