Swiss Franc faces continued pressure ahead of Fed interest rate decision

• USD/CHF stays close to two-week highs ahead of the Fed’s interest rate decision.
• Expectations of a hawkish Fed and a December rate rise underpin the US Dollar.
• Low SNB interest rates encourage carry trades, maintaining pressure on the Swiss Franc.

Trading at around 0.8303 at the time of writing, USD/CHF is near two-week highs as it consolidates 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, while weighing on the Swiss Franc (CHF).

Interest rates are widely expected to remain at 3.75%-4.00%, after the Fed raised them by 25 basis points in September. According to the CME FedWatch Tool, markets assign an 85% probability to a further increase in December. Traders will scrutinise the policy statement and Chair Warsh’s press conference for signals on that prospect.

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. Following two days of declines, oil prices have recovered after the Wall Street Journal reported that 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.

The forthcoming FOMC decision is unlikely to rule out additional tightening, 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.” The strategists “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,” highlighting the continued presence of hawkish voices on the Committee.

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

By contrast, the Swiss National Bank’s (SNB) policy rate stands at 0%, one of the lowest rates worldwide. The resulting yield disadvantage makes the Franc an appealing funding currency for carry trades. With inflation still within the SNB’s 0%-2% price stability range, the threshold for a rate rise appears relatively high.