Swiss Franc strengthens as softer US inflation pressures US Dollar
- Softer US inflation and flat wholesale prices weigh on the US Dollar.
- Federal Reserve rate hike expectations for September drop to nearly 35%.
- Swiss inflation cools to 0.4%, though SNB rate hikes remain priced in long-term.
USD/CHF halts its four-day winning streak, trading around 0.8140 during the Asian hours on Friday. The currency pair edges lower as the US Dollar (USD) faces downward pressure following a softer-than-expected US inflation report.
Market attention is now turning toward the upcoming US July Retail Sales data scheduled for release later in the day. Adding to the broader inflation picture, the Bureau of Labor Statistics reported that US wholesale costs for goods and services were flat in July, cooling more than the anticipated 0.2% growth, after a revised 0.1% decline in June. Excluding volatile food and energy components, the core Producer Price Index (PPI) rose 0.2%, coming in slightly below market consensus expectations of 0.3%. On an annual basis, headline PPI climbed 4.7% year-over-year in July, while core PPI increased by 4.2% over the same period.
These cooling inflation metrics have shifted expectations regarding Federal Reserve policy. According to the CME FedWatch Tool, markets are now pricing in a 34.8% probability of a U.S. rate hike at the upcoming September meeting, down from 40% immediately following the PPI data release.
Meanwhile, inflation pressures in Switzerland have also eased. Swiss inflation dropped to 0.4% in July from 0.5%, its lowest level in four months, highlighting the limited pass-through from higher energy prices linked to geopolitical tensions. This lower reading contrasts with the Swiss National Bank's (SNB) expectation of a modest near-term pickup in inflation, which followed its recent decision to hold its policy rate at 0%.
The SNB is widely expected to leave borrowing costs unchanged throughout the year, treating further cuts as a contingency rather than the baseline scenario, given that Swiss banks have suffered no severe damage. While most economists do not foresee the first SNB rate hike until early 2028, currency markets continue to price in an increase as early as March 2027.
Franc softness seen persisting as SNB keeps inflation risks in check
Analysts at OCBC note that “near-term inflation risks remain limited,” even as the recent depreciation of the Swiss Franc could eventually feed through via higher imported prices. They judge that any such impact “is unlikely to be felt for at least another two quarters,” and stress that domestic price pressures “remain subdued and below the midpoint of the SNB's 0-2% price stability range,” reinforcing expectations that the SNB can afford to stay patient on policy and tolerate further Franc weakness.
Swiss Franc FAQs
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.
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.
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.
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.
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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