Swiss Franc slips as US employment data takes centre stage

• The Swiss Franc comes under pressure as the US Dollar steadies following its election-led sell-off.
• Clues to the Fed’s next policy decision are in focus as traders await US Jobless Claims and Friday’s NFP release.
• The Franc offers a lower yield than its major peers with the SNB’s policy rate at 0%.

USD/CHF recovers on Thursday as the Swiss Franc (CHF) surrenders its earlier gains, with the US Dollar (USD) beginning to steady after volatility surrounding the US midterm elections. Having bounced from an intraday low of 0.8135, the pair is trading near 0.8176 at the time of writing, a gain of 0.10% for the day.

Wednesday saw the US Dollar drop to five-week lows following the Democrats’ victory in both houses of Congress. Their control raised the possibility of political gridlock that could constrain fresh tax cuts and spending packages. Expectations also grew that US President Donald Trump would face greater pressure to bring the US-Iran war to an end. Oil prices consequently fell sharply, easing inflation concerns to some extent.

With the initial post-election reaction fading, renewed focus on the Federal Reserve’s (Fed) hawkish policy outlook is helping the US Dollar regain its footing and lending underlying support to the Greenback. 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, however, are still substantially above pre-war levels despite their decline, making it harder for the Fed to return inflation sustainably to its 2% target. Inflation remains above target while economic growth continues to hold up. Against this backdrop, traders see the possibility of a further Fed rate hike in December, with odds of around 79% indicated by the CME FedWatch Tool.

Fresh signals on the Fed’s policy outlook could come from the next US labour market releases. Weekly Initial Jobless Claims are scheduled for 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 hike still faces a high threshold: although the latest data indicate a rise in inflation, 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.”