Swiss Franc eases as US Dollar gains counter the impact of lower yields

• Wednesday’s Fed interest rate decision keeps markets cautious, supporting a firmer US Dollar and a modest rise in USD/CHF.
• An October rate hold is expected by markets when the Fed announces its policy decision on Wednesday.
• Safe-haven demand pushed the Swiss 10-year government bond yield down to around 0.47%.

With the US Federal Reserve (Fed) due to announce its interest rate decision on Wednesday, caution is keeping the US Dollar (USD) firm. Against this backdrop, USD/CHF is edging up around 0.8280 in Tuesday’s Asian session following two days of gains, although the pair’s movement remains limited.

An 89.5% probability of unchanged rates at the October policy meeting is currently priced in, according to the CME FedWatch Tool, alongside an 82.3% chance of an increase in December. These expectations reflect financial markets’ view that the Federal Reserve will hold rates steady at its forthcoming October meeting before potentially raising them again in December.

Describing the inflation backdrop, Navy Federal Credit Union chief economist Heather Long said: “Inflation is still the No. 1 problem in the US economy, and there are a lot of signs it is getting more broad-based.” She added: “For consumers, it means really high borrowing costs for the foreseeable future.” Nevertheless, Heather said, “given that it’s right before an election,” adding that “they won’t hike in October.”

Growing concern about Europe’s fiscal outlook has encouraged safe-haven demand, taking the Swiss 10-year government bond yield down to around 0.47%. The accompanying strength in the Swiss Franc (CHF) is limiting further gains in USD/CHF.

According to the Swiss National Bank (SNB) Meeting Minutes, policymakers saw inflationary pressures but no evidence of spillovers into the wider economy. They linked the recent increase in inflation chiefly to more expensive oil and a weaker CHF.

USD/CHF advance expected to extend towards nearby resistance

UOB Group strategists see further upside following the recent sharp advance in USD/CHF. They describe the Dollar as “rising sharply to a high of 0.8255” on Friday, followed by a move to “0.8278 before settling at 0.8271 (+0.27%)” yesterday. Although they acknowledge that “conditions are overbought after the sharp rise over the past two days,” they highlight “scope for USD to test 0.8290,” tempered by the warning that “a sustained advance above this level is unlikely.” Following the pair’s rapid climb, the first downside level to watch is identified by UOB’s observation that “support is at 0.8250”.