Hawkish Fed outlook fails to dent Swiss Franc gains against US Dollar

December Fed rate hike bets support the US Dollar, potentially helping USD/CHF recover.
13% is the market-implied probability of a larger 50-basis-point Federal Reserve rate increase in December.
0% is the rate the Swiss National Bank is expected to maintain as inflation stays contained and oil prices decline.

0.8330 is the level around which USD/CHF trades in Thursday’s Asian session. The pair is edging down following two days of advances. A recovery remains possible as stronger-than-expected US Consumer Price Index (CPI) inflation figures reinforce a more hawkish Federal Reserve policy outlook, supporting the US Dollar (USD).

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

A quarter-point increase in December would have the backing of Fed Governor Christopher Waller, he indicated earlier this week. He would also support a half-point move if inflation deteriorates. His comments have prompted traders to increase their bets on a December rate rise. The CME FedWatch Tool now puts the market-implied probability of a December hike at 87%, with nearly a 13% chance of a larger 50-basis-point increase.

USD Support: Fed Independence and Lasting Safe-Haven Appeal

An improved backdrop for the USD reflects reduced concerns over the Federal Reserve’s independence, according to strategists at Rabobank. They argue that “diminished fears about political interference on the Fed is a supportive factor for the USD.” The strategists also point to the market response “at the start of the Gulf war,” when “strong demand for the USD undermined last year’s claims that the USD’s had lost at least part of its safe haven value,” as evidence of its defensive appeal. They see the Dollar’s safe-haven role as structurally entrenched, with its attraction “linked to its embedded position in global payments systems, which could take decades to shake.”

For the Swiss National Bank (SNB), the broad expectation is that rates will remain at 0% at its next meeting. Markets price in a possible increase by early 2027. Most economists, however, expect the first rise closer to late 2027.

With price pressures still contained, SNB Chairman Schlegel said the central bank has fulfilled its medium-term price stability mandate. Falling oil prices are further reducing inflation risks, he noted.

Swiss Franc: Frequently Asked Questions

Swiss Franc: Main Exchange Rate Drivers

Switzerland’s official currency, the Swiss Franc (CHF), ranks among the world’s top ten most traded currencies. Trading volumes far exceed the size of the Swiss economy. Broad market sentiment, domestic economic conditions and Swiss National Bank (SNB) actions are among the influences on its value. From 2011 to 2015, the Franc was pegged to the Euro (EUR). The sudden removal of that peg drove a rise of more than 20% in the Franc’s value and triggered market turmoil. Although the peg no longer applies, the Swiss economy’s heavy reliance on the neighbouring Eurozone means CHF movements still tend to track those of the Euro closely.

Swiss Franc: The Basis of Its Safe-Haven Status

Investors tend to buy the Swiss Franc (CHF) during periods of market stress, giving it safe-haven status. That appeal stems from Switzerland’s perceived standing globally. Its stable economy, robust export sector, substantial central bank reserves and longstanding policy of neutrality in global conflicts make the currency attractive to investors seeking to avoid risk. During turbulence, CHF is therefore likely to appreciate against currencies regarded as riskier investments.

Swiss National Bank: Policy Effects on the Franc

Monetary policy decisions at the Swiss National Bank (SNB) are taken at four meetings a year, once each quarter. This is less frequent than at other major central banks. Its objective is annual inflation below 2%. If inflation exceeds that target, or is expected to do so in the foreseeable future, the SNB will seek to curb price increases by raising its policy rate. Higher rates typically support the Swiss Franc (CHF): the resulting increase in yields makes Switzerland more attractive to investors. Rate reductions, by contrast, tend to weigh on CHF.

Swiss Franc: Sensitivity to Economic Data

Swiss macroeconomic releases help investors judge the economy’s health and can affect the valuation of the Swiss Franc (CHF). Despite the economy’s generally stable character, abrupt shifts in growth, inflation, the current account or the central bank’s currency reserves can move CHF. Strong growth, low unemployment and high confidence generally support the currency. Data signalling a loss of economic momentum, in contrast, is likely to lead to CHF depreciation.

Eurozone Monetary Policy: Implications for the Swiss Franc

Switzerland’s small, open economy relies heavily on economic conditions in the neighbouring Eurozone. Its main economic partner and an important political ally is the wider European Union. Stability in Eurozone macroeconomic conditions and monetary policy is therefore essential to Switzerland and, in turn, the Swiss Franc (CHF). Reflecting this dependence, some models put the correlation between the fortunes of the Euro (EUR) and CHF at more than 90%, close to a perfect relationship.