USD/CHF holds below 0.9050 ahead of Fed rate decision
- USD/CHF softens to around 0.9035 in Wednesday’s early European session.
- Investors brace for the Fed rate decision on Wednesday, with no change in rate expected.
- The Swiss Franc jumps as investors seek safety.
The USD/CHF pair loses ground to near 0.9035 on Wednesday during the early European trading hours. The weaker US Dollar (USD) and a decline in US Treasury yields drag the pair lower. The markets might turn cautious ahead of the US Federal Reserve (Fed) interest rate decision later on Wednesday.
The Fed is widely expected to hold its benchmark rate unchanged at its January meeting on Wednesday. The strong US fundamental story, elevated inflation, and a more hawkish Fed continue to favor the Greenback in the near term. There is no updated Summary of Economic Projections (SEP), but investors will closely watch Fed Chair Jerome Powell’s press conference as it might offer some hints about the monetary policy outlook.
On the other hand, the Swiss Franc (CHF) strengthens as investors rush into safe-haven assets. The uncertainty surrounding US President Donald Trump's tariff policies and the ongoing Russia and Ukraine conflict could lift the CHF against the USD. Officials and media outlets reported on Wednesday that Ukrainian drones targeted oil and power facilities in western parts of Russia.
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.