USD/CHF falls to near 0.8450 due to the likelihood of an aggressive rate cut by the Fed

• USD/CHF depreciates as traders expect the Federal Reserve to implement a 50 basis point rate cut.
• The CME FedWatch Tool indicates the likelihood of a 50 basis point cut has risen to 67.0%.
• The Swiss National Bank is expected to deliver a 25 basis point rate cut at its September meeting.

USD/CHF retraces its recent gains, trading around 0.8450 during the Asian hours on Wednesday. The US Dollar (USD) faces challenges amid rising expectations that the US Federal Reserve (Fed) may announce a substantial 50 basis point rate cut at September’s meeting scheduled later in the North American session.

The CME FedWatch Tool indicates that markets are assigning a 33.0% probability to a 25-basis-point rate cut, while the likelihood of a 50 basis point cut has risen to 67.0%, up from 62.0% just the previous day.

On Tuesday, JP Morgan CEO Jamie Dimon remarked that whether the Fed cuts interest rates by 25 or 50 basis points, the impact will be “not earth-shattering.” Dimon emphasized that while the Fed needs to make these adjustments, such rate changes are relatively minor in the broader context, as "there's a real economy" operating beyond the Fed’s rate modifications, according to Bloomberg.

On Tuesday, US Retail Sales increased by 0.1% MoM in August, following a revised 1.1% growth in July, surpassing expectations of a 0.2% decline and indicating resilient consumer spending. Meanwhile, the Retail Sales Control Group rose by 0.3%, slightly below the previous month's 0.4% increase.

On the CHF front, traders are likely to pay close attention to the Trade Balance data scheduled for release on Thursday. This report could provide valuable insights into the Swiss economic conditions. Moreover, the solid Swiss Franc (CHF) is leading to speculation that the Swiss National Bank (SNB) could be the first major central bank to implement a significant rate cut this year. Economists are forecasting that the Swiss National Bank (SNB) might announce a 25 basis point rate cut at its September meeting.

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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