Swiss Franc under pressure with traders awaiting Fed interest rate decision

• Two-week highs remain in sight for USD/CHF ahead of the Fed’s interest rate decision.
• Expectations of a hawkish Fed and a December rate increase underpin the US Dollar.
• Low SNB interest rates encourage carry trades, keeping the Swiss Franc under pressure.

USD/CHF is trading around 0.8303 at the time of writing. Near two-week highs, the pair is consolidating modest gains on Wednesday before the Federal Reserve’s (Fed) monetary policy decision at 18:00 GMT. Demand for higher-yielding currencies is keeping the pair supported for a fourth consecutive day and weighing on the Swiss Franc (CHF).

Following September’s 25-basis-point increase, the Fed is widely expected to keep interest rates at 3.75%-4.00%. Attention will centre on the policy statement and Chair Warsh’s press conference for signals on a further increase in December. Markets assign an 85% probability to that outcome, according to the CME FedWatch Tool.

With the Middle East energy shock threatening to prolong inflation above its 2% target, the US central bank is likely to retain its hawkish stance. After two days of declines, oil prices have recovered following a Wall Street Journal report. The report said Washington had warned Gulf states about a possible military operation against Iran after the US midterm elections.

Ahead of the decision, the US Dollar Index (DXY) is trading around 102.40, close to two-week highs, as the US Dollar remains firm. The index measures the Greenback against six major currencies.

Further tightening is unlikely to be ruled out by the upcoming FOMC decision, according to strategists at Brown Brothers Harriman. They expect “the FOMC vote split and Fed Chair Kevin Warsh’s assessment of inflation” to “keep a December hike in play.” Highlighting the Committee’s persistently hawkish voices, the strategists say they “lean towards a 9-3 vote to hold, with Beth M. Hammack, Neel Kashkari, and Lorie K. Logan dissenting in favor of a 25bps hike, as they did in July,”

BBH also expects Warsh to be “likely to reiterate that inflation remains too high and underlying inflation pressures have yet to improve meaningfully,” and concludes that “bottom line, robust US economic activity and rising price pressures reinforce the Fed’s hawkish bias, keeping rate differentials supportive of USD.”

At 0%, the Swiss National Bank’s (SNB) policy rate is among the world’s lowest. That leaves the Franc at a yield disadvantage and makes it an appealing funding currency for carry trades. With inflation still within the SNB’s 0%-2% price stability range, the threshold for a rate increase appears relatively high.