Swiss Franc slips as next week’s Fed interest rate decision takes centre stage

USD/CHF recovers from a one-month trough, supported by a partial recovery in the US Dollar and Treasury yields.
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 look for further guidance on the interest rate trajectory.

A recovery in the US Dollar (USD) and US Treasury yields lifts USD/CHF on Friday, helping the pair reverse the previous day’s decline. Having dropped to a one-month trough of 0.8191 on Thursday, the pair is trading near 0.8250 at the time of writing, a gain of 0.56% for the day.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Risk aversion had supported the Swiss Franc (CHF) on Thursday, when doubts about the sustainability of AI-related investments put equities under pressure. The flight to government bonds also sent US Treasury yields sharply lower, weighing further on the Greenback.

By Friday, however, that trend is fading. After a 16.6-basis-point decline to 4.95% in the previous session, the benchmark 10-year US Treasury yield is recovering towards 5%. The US Dollar Index (DXY) is trading near 101.75, having hit a three-week trough of 101.45 on Thursday. The index measures the Greenback against a basket of six major currencies.

A mixed set of US economic readings offers no clear direction. At 57.6 in October, the preliminary S&P Global Composite Purchasing Managers’ Index (PMI) was down from September’s 58.4. Manufacturing edged up from 55.9 to 56.0, exceeding the 55.6 forecast, whereas Services fell from 58.8 to 57.9, in line with expectations. Separately, the final University of Michigan Consumer Sentiment Index was revised higher from 46.3 to 48.0. Inflation expectations were unchanged, with the 1-year measure at 4.7% and the 5-year measure at 3.5%.

Next week’s interest rate announcement from the Federal Reserve (Fed) is now the main focus. Following a 25 bps increase in September, the central bank is widely expected to leave rates unchanged. A further increase before year-end nevertheless remains possible: higher energy prices associated with Middle East tensions threaten to prolong the period in which inflation stays above central banks’ 2% target.

The Swiss Franc remains exposed in this environment, with the SNB’s policy rate of 0% maintaining a substantial gap with the Fed. Released on Thursday, the minutes of the SNB’s September meeting indicated no pressing need for policy tightening, noting that “the Governing Board deemed current monetary conditions appropriate to ensure price stability over the medium term.”

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

SNB: Key Questions Answered

What Role Does the Swiss National Bank Play?

Switzerland’s central bank, the Swiss National Bank (SNB), operates independently with a mandate to safeguard price stability over the medium and long term. It pursues this objective by keeping monetary conditions appropriate, with those conditions shaped by interest rate levels and exchange rates. The SNB defines price stability as an annual increase of less than 2% in the Swiss Consumer Price Index (CPI).

How Do Swiss National Bank Interest Rate Decisions Influence the Swiss Franc?

Guided by its price stability objective, the Swiss National Bank (SNB) Governing Board sets the policy rate at the level it considers appropriate. If inflation exceeds the target, or is forecast to do so in the foreseeable future, the bank will seek to curb excessive price increases by raising that rate. The higher yields associated with higher interest rates generally support the Swiss Franc (CHF), as they make Switzerland more attractive to investors. Lower interest rates, by contrast, usually put pressure on CHF.

How Does the Swiss National Bank Intervene in Forex Markets?

The Swiss National Bank (SNB) does intervene regularly in foreign exchange markets to prevent excessive appreciation of the Swiss Franc (CHF) against other currencies. An overly strong CHF undermines the competitiveness of Switzerland’s major export sector. To restrain its rise against the Euro, the SNB maintained a peg to the Euro between 2011 and 2015. Intervention draws on the bank’s substantial foreign exchange reserves and typically involves purchasing currencies such as the US Dollar or the Euro. When inflation is high, especially because of energy costs, the SNB holds back from intervention. A stronger CHF lowers the cost of energy imports, helping cushion Swiss households and businesses from the price shock.

What Is the Swiss National Bank Governing Council’s Monetary Policy Schedule?

Monetary policy assessments take place at the SNB’s quarterly meetings in March, June, September and December. Following each assessment, the bank announces a monetary policy decision and publishes a medium-term inflation forecast.