USD/CHF weakens to near 0.7800 as Middle East tensions lift Swiss Franc

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The USD/CHF pair loses traction to around 0.7805 during the early European session on Wednesday. The Swiss Franc (CHF) gathers strength against the Greenback on safe-haven flows stemming from Middle East tensions.

USD/CHF edges lower to near 0.7805 in Wednesday’s early European session.
Rising tensions in the Middle East could boost the Swiss Franc, but verbal intervention from the SNB might cap its upside.
Traders await the Swiss CPI and US Services PMI data later on Wednesday.

The US and Israel’s attacks on Iran and Lebanon continue, with a strike on a hotel near Beirut and the building of the Assembly of Experts in the Iranian city of Qom. Tehran continues retaliatory attacks on Israel and US targets in the Middle East, with strikes reported on the US embassy in Dubai and a port in the city of Fujairah in the United Arab Emirates. Heightened geopolitical risks continue to drive traders toward the Swiss Franc, a safe-haven currency, in the near term.

The Swiss National Bank (SNB) on Monday delivered aggressive verbal intervention, signaling a willingness to counter CHF's 'excessive' appreciation. This, in turn, might cap the upside for the CHF and act as a tailwind for the pair.

"We are prepared to intervene in the foreign exchange market to counter a rapid and excessive appreciation of the Swiss franc, which jeopardises price stability in Switzerland," the SNB said in a statement.

The Swiss Consumer Price Index (CPI) and the US February ISM Services Purchasing Managers Index (PMI) reports will be in the spotlight later on Wednesday. If the US Services PMI reading comes in better than the expectation, this might reinforce the US Federal Reserve (Fed) to adopt a more hawkish stance and keep the interest rate higher for longer.

Swiss Franc FAQs

What key factors drive the Swiss Franc?

The Swiss Franc (CHF) is Switzerland’s official currency. It is among the top ten most traded currencies globally, reaching volumes that well exceed the size of the Swiss economy. Its value is determined by the broad market sentiment, the country’s economic health or action taken by the Swiss National Bank (SNB), among other factors. Between 2011 and 2015, the Swiss Franc was pegged to the Euro (EUR). The peg was abruptly removed, resulting in a more than 20% increase in the Franc’s value, causing a turmoil in markets. Even though the peg isn’t in force anymore, CHF fortunes tend to be highly correlated with the Euro ones due to the high dependency of the Swiss economy on the neighboring Eurozone.

Why is the Swiss Franc considered a safe-haven currency?

The Swiss Franc (CHF) is considered a safe-haven asset, or a currency that investors tend to buy in times of market stress. This is due to the perceived status of Switzerland in the world: a stable economy, a strong export sector, big central bank reserves or a longstanding political stance towards neutrality in global conflicts make the country’s currency a good choice for investors fleeing from risks. Turbulent times are likely to strengthen CHF value against other currencies that are seen as more risky to invest in.

How do decisions of the Swiss National Bank impact the Swiss Franc?

The Swiss National Bank (SNB) meets four times a year – once every quarter, less than other major central banks – to decide on monetary policy. The bank aims for an annual inflation rate of less than 2%. When inflation is above target or forecasted to be above target in the foreseeable future, the bank will attempt to tame price growth by raising its policy rate. Higher interest rates are generally positive for the Swiss Franc (CHF) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken CHF.

How does economic data influence the value of the Swiss Franc?

Macroeconomic data releases in Switzerland are key to assessing the state of the economy and can impact the Swiss Franc’s (CHF) valuation. The Swiss economy is broadly stable, but any sudden change in economic growth, inflation, current account or the central bank’s currency reserves have the potential to trigger moves in CHF. Generally, high economic growth, low unemployment and high confidence are good for CHF. Conversely, if economic data points to weakening momentum, CHF is likely to depreciate.

How does the Eurozone monetary policy affect the Swiss Franc?

As a small and open economy, Switzerland is heavily dependent on the health of the neighboring Eurozone economies. The broader European Union is Switzerland’s main economic partner and a key political ally, so macroeconomic and monetary policy stability in the Eurozone is essential for Switzerland and, thus, for the Swiss Franc (CHF). With such dependency, some models suggest that the correlation between the fortunes of the Euro (EUR) and the CHF is more than 90%, or close to perfect.