Swiss Franc weakens as US employment data comes into focus

• A steadier US Dollar following the election-led sell-off puts pressure on the Swiss Franc.
• US Jobless Claims and Friday’s NFP report are in focus as traders assess the Fed’s next policy step.
• At 0%, the SNB’s policy rate puts the Franc at a yield disadvantage to major counterparts.

USD/CHF trades near 0.8176 at the time of writing. The pair is up 0.10% on Thursday, having rebounded from an intraday low of 0.8135. The Swiss Franc (CHF) has surrendered its earlier gains as signs of stability in the US Dollar (USD), following US midterm election volatility, support the pair’s recovery.

Wednesday saw the US Dollar slide to five-week lows as Democrats secured both houses of Congress. The outcome raised the prospect of political gridlock, potentially constraining further tax cuts and spending packages. It also strengthened expectations that US President Donald Trump would face greater pressure to end the US-Iran war. Oil prices dropped sharply as a result, easing some inflation concerns.

With the immediate election reaction fading, traders are refocusing on the Federal Reserve’s (Fed) hawkish policy outlook. That backdrop is helping the US Dollar regain its footing and providing underlying support. After touching an intraday low of 101.20, the US Dollar Index (DXY) is trading near 101.60. The index measures the Greenback against a basket of six major currencies.

Energy prices are still substantially above pre-war levels despite the pullback, making the Fed’s task of returning inflation sustainably to its 2% target more difficult. Inflation remains above target while economic growth is holding up. Against that backdrop, traders expect the Fed could raise rates again in December; the CME FedWatch Tool puts the probability at around 79%.

Fresh signals on the Fed’s policy outlook may come from the next US labour market releases. Weekly Initial Jobless Claims are due on Thursday, followed by Nonfarm Payrolls (NFP) on Friday.

Wide interest rate gaps between Switzerland and other major economies continue to weigh on the Franc. With the Swiss National Bank’s (SNB) policy rate at 0%, the currency remains at a yield disadvantage.

A rate increase still faces a high threshold, even though recent figures indicate that inflation is accelerating: it remains within the SNB’s price stability range. In remarks on Thursday, SNB Chairman Martin Schlegel said the central bank had “not yet seen any significant second-round effects” and “would intervene if price stability were at risk.”