Swiss Franc holds gains against US Dollar despite hawkish Fed outlook

USD/CHF may regain as the US Dollar gains support on Fed rate hike bets in December.
Markets price in a 13% probability of a larger 50-basis-point Federal Reserve rate hike in December.
The Swiss National Bank is expected to hold rates at 0% with contained inflation and falling oil prices.

USD/CHF inches lower after two days of gains, trading around 0.8330 during Asian hours on Thursday. The currency pair could regain ground as the US Dollar (USD) draws support from an increasingly hawkish Federal Reserve policy outlook, driven by hotter-than-expected US Consumer Price Index (CPI) inflation data.

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Traders have ramped up bets on a December rate hike after Fed Governor Christopher Waller indicated earlier this week that he would support a quarter-point increase, or even a half-point move if inflation worsens. According to the CME FedWatch Tool, markets are now pricing in an 87% probability of a December rate hike, alongside nearly a 13% chance of a larger 50-basis-point increase.

Dollar support underpinned by Fed independence and enduring safe haven role

Strategists at Rabobank argue that the backdrop for the USD has improved as “diminished fears about political interference on the Fed is a supportive factor for the USD.” They add that the market reaction “at the start of the Gulf war,” where “strong demand for the USD undermined last year’s claims that the USD’s had lost at least part of its safe haven value,” reinforces the currency’s defensive credentials. In their view, the Dollar’s safe-haven status is structurally anchored, with its appeal “linked to its embedded position in global payments systems, which could take decades to shake.”

Meanwhile, the Swiss National Bank (SNB) is widely expected to hold interest rates steady at 0% during its upcoming meeting. Although financial markets are pricing in a potential rate hike by early 2027, most economists anticipate the first increase will take place closer to late 2027.

SNB Chairman Schlegel noted that price pressures remain contained and the central bank has met its medium-term price stability mandate, with declining oil prices further easing inflationary risks.

Swiss Franc FAQs

What key factors drive the Swiss Franc?

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.

Why is the Swiss Franc considered a safe-haven currency?

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.

How do decisions of the Swiss National Bank impact the Swiss Franc?

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.

How does economic data influence the value of the Swiss Franc?

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.

How does the Eurozone monetary policy affect the Swiss Franc?

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.

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