Swiss Franc weakens as focus shifts to next week’s Fed interest rate decision

• A recovery in the US Dollar and Treasury yields lifts USD/CHF from a one-month low.
• The Swiss Franc remains under pressure from the interest rate differential between the Fed and the SNB.
• Next week's Fed decision is in focus as traders seek further guidance on the path of interest rates.

Trading at around 0.8250 at the time of writing, USD/CHF is 0.56% higher on Friday, recovering from Thursday’s one-month low of 0.8191. The pair has reversed the previous day’s losses as the US Dollar (USD) recovers alongside US Treasury yields.

Concerns about the sustainability of AI-related investment put equities under pressure on Thursday, prompting defensive flows into the Swiss Franc (CHF). Demand for government bonds also increased, driving US Treasury yields sharply lower and placing further pressure on the Greenback.

Friday has brought a loss of momentum in those moves. Having dropped 16.6 basis points to 4.95% the previous day, the benchmark 10-year US Treasury yield is recovering towards 5%. The US Dollar Index (DXY) is also trading around 101.75, following Thursday’s three-week low of 101.45. The index measures the Greenback against a basket of six major currencies.

The latest US economic releases paint a mixed picture. October’s preliminary S&P Global Composite Purchasing Managers’ Index (PMI) slipped to 57.6 from September’s 58.4. The manufacturing reading edged up from 55.9 to 56.0, exceeding expectations of 55.6, whereas services eased from 58.8 to 57.9, in line with forecasts. Separately, the final University of Michigan Consumer Sentiment Index was revised higher, from 46.3 to 48.0. Inflation expectations were unchanged at 4.7% for the 1-year horizon and 3.5% for the 5-year horizon.

Next week’s interest rate decision from the Federal Reserve (Fed) is now the focus. Following September’s 25 bps increase, the central bank is widely expected to leave rates unchanged. A further rise before year-end nevertheless remains possible: higher energy prices associated with Middle East tensions risk keeping inflation above central banks' 2% target for longer.

With the SNB keeping its policy rate at 0%, the substantial interest rate differential with the Fed continues to leave the Swiss Franc exposed. Minutes of the SNB’s September meeting, published on Thursday, indicated little appetite for an urgent tightening of policy. They stated that “the Governing Board deemed current monetary conditions appropriate to ensure price stability over the medium term.”

Although policymakers observed that “inflation is likely to increase again somewhat in the short term due to higher energy prices,” they also stated that “an increased willingness to intervene in foreign exchange markets is no longer necessary in the current environment.”