Swiss Franc gains as Fed rate pause expectations weigh on US Dollar

USD/CHF comes under pressure as expectations of an October Fed rate pause weigh on the US Dollar (USD).
Demand for safe havens softens following US President Donald Trump's decision to rule out immediate military strikes against Iran.
The franc found support from European fiscal worries and falling bond yields, while oil prices continued to influence inflation.

Pressure on the US Dollar (USD) pulls USD/CHF lower, with the pair trading near 0.8230 in Monday's Asian session after gaining over 0.5% the day before. The Dollar's weakness comes amid widespread expectations that the Federal Reserve (Fed) will leave interest rates unchanged before potentially delivering another hike in December.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Markets assign a 90.6% probability to unchanged rates at the October 27–28 policy meeting, according to the CME FedWatch Tool. The implied likelihood of a December rate increase stands at 79.7%.

Reduced appetite for safe havens is also weighing on the Greenback after US President Donald Trump ruled out immediate military action against Iran. According to Al Jazeera, Trump said, “there will not be a strike today,”

Nevertheless, investors remain uneasy that strikes could resume following this week's Israeli elections and next week's US midterm elections. Reports suggest Iran is ready to retaliate by targeting Israel and the UAE.

Growing unease over Europe's fiscal outlook fuelled safe-haven demand, strengthening the Swiss Franc (CHF) as the yield on Switzerland's 10-year government bond declined to 0.5%. Separately, the Swiss National Bank (SNB) Meeting Minutes showed that policymakers had identified inflationary pressures but no evidence of spillovers into the wider economy. They attributed the recent increase in inflation mainly to higher oil prices and a weaker Franc.

For the 1–3 week outlook, UOB Group strategists retain a cautious, bearish view on USD/CHF, saying they have "been holding a negative USD view since late last week." Their latest update, issued on Monday, 19 October with the pair near 0.8240, noted that the Dollar "could decline further to 0.8200." That projection has since played out: USD/CHF slipped below 0.8200 yesterday, "reaching a low of 0.8190."

Although UOB believes the Dollar "could continue to decline," it questions whether the current move can reach the next downside target of 0.8140 without a "significant increase in downward momentum". On the upside, the bank identifies 0.8250 as the pivotal level, reaffirming that "a breach of 0.8250 (‘strong resistance’ level previously at 0.8275) would indicate that USD is not declining further."

Swiss Franc: Frequently Asked Questions

Which factors shape the Swiss Franc's value?

Trading volumes in the Swiss Franc (CHF), Switzerland's official currency, far exceed the size of the country's economy, placing it among the world's ten most actively traded currencies. Broad investor sentiment, domestic economic conditions and decisions by the Swiss National Bank (SNB) are among the influences on its value. A peg linked the Swiss Franc to the Euro (EUR) between 2011 and 2015. Its abrupt removal sent the Franc more than 20% higher and caused market turmoil. Although that peg no longer applies, CHF movements generally remain closely aligned with those of the Euro because Switzerland's economy relies heavily on the neighbouring Eurozone.

What gives the Swiss Franc its safe-haven status?

Investors often turn to the Swiss Franc (CHF) during periods of market strain, giving it a reputation as a safe-haven asset. Switzerland's perceived economic stability, robust export industry, substantial central bank reserves and longstanding neutrality in international conflicts underpin this appeal to investors seeking to reduce risk. During turbulent periods, CHF is therefore likely to appreciate against currencies regarded as riskier investments.

How can Swiss National Bank decisions move the Swiss Franc?

Monetary policy is set by the Swiss National Bank (SNB) at four meetings each year, one per quarter, a less frequent schedule than that of other major central banks. Its objective is to keep annual inflation below 2%. If inflation exceeds the target, or is expected to do so in the foreseeable future, the SNB seeks to curb price increases by raising its policy rate. By lifting yields and making Switzerland more appealing to investors, higher interest rates typically support the Swiss Franc (CHF). Rate reductions, by contrast, generally put downward pressure on CHF.

Which economic indicators matter for the Swiss Franc?

The Swiss Franc's (CHF) valuation can respond to domestic macroeconomic releases, which provide important insights into the health of Switzerland's economy. Despite the economy's generally stable nature, abrupt shifts in growth, inflation, the current account or central bank currency reserves can prompt movements in CHF. Strong growth, low unemployment and elevated confidence usually support the currency. Data signalling a loss of economic momentum, on the other hand, is likely to weaken CHF.

Why does Eurozone monetary policy matter for the Swiss Franc?

Switzerland's small, open economy relies heavily on economic conditions in the neighbouring Eurozone. With the wider European Union serving as its leading economic partner and an important political ally, stability in the Eurozone's macroeconomic environment and monetary policy is vital to Switzerland and, consequently, the Swiss Franc (CHF). Reflecting these close links, some models put the correlation between movements in the Euro (EUR) and CHF above 90%, approaching a perfect correlation.