Swiss Franc stays under pressure with traders awaiting the Fed’s decision on interest rates

• With the Fed’s interest rate decision in focus, USD/CHF stays close to two-week highs.
• Support for the US Dollar persists as markets anticipate a hawkish Fed and price in a December rate hike.
• Carry trades encouraged by the SNB’s low interest rates continue to weigh on the Swiss Franc.

Demand for higher-yielding currencies keeps USD/CHF on a positive footing for a fourth straight day on Wednesday, while the Swiss Franc (CHF) remains under pressure. The pair is consolidating modest gains ahead of the Federal Reserve’s (Fed) monetary policy decision, due at 18:00 GMT. At the time of writing, it is trading around 0.8303, close to two-week highs.

After September’s 25-basis-point hike, the Fed is widely anticipated to hold interest rates at 3.75%-4.00%. Attention will turn to the policy statement and Chair Warsh’s press conference for indications of whether another increase could follow in December. The CME FedWatch Tool puts the market-implied probability of that outcome at 85%.

With the Middle East energy shock threatening to prolong inflation’s stay above the 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 remains firm. The US Dollar Index (DXY), a measure of the Greenback against six major currencies, is trading around 102.40, close to two-week highs.

Further tightening is unlikely to be ruled out by the forthcoming FOMC decision, 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.” Highlighting the Committee’s persistent hawkish voices, the strategists say they “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,”

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

Meanwhile, a policy rate of 0% at the Swiss National Bank (SNB), among the world’s lowest, puts the Franc at a yield disadvantage while enhancing its appeal as a funding currency for carry trades. With inflation still within the SNB’s 0%-2% price stability range, the threshold for a rate hike appears relatively high.