Swiss Franc eases as traders weigh US inflation data and geopolitical risks

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The Swiss Franc (CHF) weakens against the US Dollar (USD) on Wednesday as renewed tensions between the United States and Iran support demand for the Greenback, while traders show a muted reaction to the latest US inflation data.

The Swiss Franc weakens as escalating tensions in the Middle East support the US Dollar.
US headline inflation reaches its highest level since April 2023.
Markets turn their focus to US producer inflation data due on Thursday.

US inflation picked up again in May as higher Oil prices continued to feed into consumer costs. Annual inflation rose to 4.2%, the highest since April 2023, although the monthly pace eased slightly to 0.5% from 0.6%.

Despite the jump in the headline figure, Core inflation rose only modestly to 2.9% from 2.8%, while the monthly reading slowed to 0.2% from 0.4%, coming in below expectations.

The data did little to change expectations that the Federal Reserve (Fed) could raise interest rates later this year. However, the modest increase in core inflation suggested underlying price pressure remains relatively contained, briefly weighing on the US Dollar before it recovered as traders turned their attention back to the evolving situation in the Middle East.

US President Donald Trump renewed threats of military action against Iran after Tehran shot down a US Apache helicopter near the Strait of Hormuz earlier this week. On Tuesday, the US carried out retaliatory strikes against Iranian targets, while Iran responded with attacks on US military bases in the Gulf.

Speaking on Wednesday, Trump said "we have every right" to resume attacks on Iran, adding that "we hit Iran hard yesterday" and warning that "we will hit again today." He also threatened to target Iranian power plants and bridges.

The remarks helped lift the US Dollar and Oil prices. The US Dollar Index (DXY), which tracks the Greenback's value against six major peers, recovered to around 99.92 after briefly slipping to 99.72 earlier in the day.

Traders now turn their attention to the US Producer Price Index (PPI) report due on Thursday for further clues on the inflation outlook. Economists expect headline PPI to accelerate to 6.4% YoY from 6.0%, while core PPI is forecast to rise to 5.4% from 5.2%.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.