The USD/CHF has experienced an uptick as market participants assign a 56.5% probability to the likelihood of an additional rate hike occurring in October. Fed Chair Kevin Warsh emphasises that ongoing inflation continues to be excessively elevated, indicating the likelihood of additional tightening measures. The Swiss Franc experienced depreciation as a result of an expanding differential in US interest rates and evolving dynamics within carry trades. USD/CHF gains ground after two days of losses, trading around 0.8230 during the Asian hours on Monday. The pair appreciates as the US Dollar gains support amid hawkish sentiment surrounding the Federal Reserve policy outlook.
Last week, the US Federal Reserve implemented a 25-basis-point increase in interest rates, marking its first adjustment in three years, as officials aimed to address inflation and indicated the possibility of additional increases in the near future. Markets are now pricing in nearly a 56.5% chance of another US rate hike when the Fed meets next in October, compared with nearly 42.5% a week ago, according to the CME FedWatch tool. Fed Chair Kevin Warsh said that “the plain fact is that inflation is too high and has been for too long.” He added that “This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.”
The USD/CHF pair gains support as the Swiss Franc has weakened due to a widening interest rate differential with the United States and intense selling pressure driven by new carry trades. This shift is largely attributed to the Federal Reserve delivering its first rate hike in three years, which significantly boosted demand for the greenback. Simultaneously, the Bank of Japan’s policy tightening, along with a historic intervention by Washington and Tokyo to bolster the yen, has diminished the Swiss Franc’s attractiveness as a principal funding source for carry trades.
Economists anticipate that the Swiss National Bank will uphold its existing position, asserting that “we expect the Swiss National Bank to keep its policy rate at 0% next Thursday and to remain on hold over the coming quarters.” They contend that robust Swiss growth and a marginally weaker Franc have not yet resulted in concerning price pressures, enabling the SNB to maintain an accommodative policy stance for an extended period while inflation stays low.
