USD/CHF holds steady near 0.8800, traders await Fed, SNB rate decisions
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Lallalit Srijandorn
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18 Mar @ 05:56 (GMT+0)

USD/CHF holds steady near 0.8800, traders await Fed, SNB rate decisions

  • USD/CHF flat lines around 0.8810 in Tuesday’s early European session. 
  • Geopolitical risks in the Middle East could boost the safe haven flows, benefiting the Swiss Franc.
  • The Fed and SNB interest rate decisions will be the highlights later this week. 

The USD/CHF pair trades on a flat note near 0.8810 during the early European session on Tuesday. The potential upside of the pair might be limited due to the heightened economic uncertainty and rising geopolitical tensions in the Middle East. 

The US Dollar Index (DXY), an index of the value of the USD relative to a basket of foreign currencies, currently edges higher to 103.55, adding 0.13% on the day. The Greenback got support from US Retail Sales on Monday that showed a modest rebound in February after a revised 1.2% decline in January.

Markets expect the US Federal Reserve (Fed) to hold interest rates at its March meeting on Wednesday, with the next cut in June. The US central bank will give its new economic projections after the rate decision, which might offer some hints about how officials view the likely impact of US President Donald Trump's policies and US economic outlook.

On the other hand, the escalating geopolitical tensions in the Middle East could boost the safe haven currency like the Swiss Franc (CHF) and create a headwind for USD/CHF. On Tuesday, Israeli Prime Minister Benjamin Netanyahu said in a statement, "From now on, Israel will act against Hamas with increasing military force.” The order came after the militant group refused to release our hostages and rejected all offers it received from the US presidential envoy and the mediators.

The Swiss National Bank (SNB) is anticipated to cut its main policy rate by a quarter percentage point on Thursday to 0.25% and hold it there until at least 2026, according to most economists polled by Reuters. "Previously there had appeared to be a reasonable chance of the SNB cutting to zero or below, but those chances now look slim," said Adrian Prettejohn, Europe economist at Capital Economics.

Swiss Franc FAQs

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 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.

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 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.