Swiss Franc strengthens as US Dollar loses momentum following US PCE inflation data

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USD/CHF edges lower on Friday, retracing all the gains recorded this week as the US Dollar (USD) rally loses momentum following the latest US Personal Consumption Expenditures (PCE) data, which broadly came in line with expectations and showed that underlying inflationary pressures remain relatively

USD/CHF gives back weekly gains as US PCE data weighs on the US Dollar.
Softer-than-expected inflation readings temper expectations of an imminent Federal Reserve rate hike.
IMF backs the SNB's current policy stance while urging flexibility amid heightened uncertainty.

At the time of writing, the pair trades around 0.8071, extending losses for a second consecutive day after hitting an 11-month high of 0.8139 on Wednesday.

Data released on Thursday showed the headline PCE rose 0.4% MoM in May, unchanged from April but below the 0.5% forecast. Core PCE held steady at 0.3%, matching expectations.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trades around 101.12 after hitting a more than one-year high near 101.80 earlier this week.

The data helped temper expectations of an imminent Federal Reserve (Fed) interest rate hike. However, with annual inflation still running well above the central bank's 2% target, traders continue to expect interest rates to remain unchanged in the coming months while leaving the door open to a rate hike later this year.

On Thursday, Chicago Fed President Austan Goolsbee said core inflation is "still well too high" and is "trending the wrong way." New York Fed President John Williams said it remains imperative for the Fed to bring inflation back to its 2% target.

A Reuters poll released on Friday showed that 78 of 102 economists expect the Fed to keep interest rates unchanged at 3.50-3.75% through the end of 2026.

On the Swiss side, the Swiss National Bank (SNB) continues to maintain a steady monetary policy stance, keeping its policy rate at 0% as inflation remains near the lower end of the central bank's 0-2% price stability range.

The International Monetary Fund (IMF) said on Thursday, "The monetary policy stance is appropriate, but high uncertainty warrants maintaining flexibility to adjust policy rates in either direction."

"Under a stagflation scenario triggered by a sharp and sustained rise in energy prices, higher interest rates might be necessary." It added that in "a severely disinflationary demand shock," "negative interest rates, despite possible financial system distortions, are the strongest of the SNB's policy options," the IMF added.

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.