Why is the Swiss Franc retaining gains against the US Dollar despite a hawkish Fed outlook?

USD/CHF could recover as bets on a December Fed rate hike lend support to the US Dollar.
A larger 50-basis-point Federal Reserve rate increase in December carries a 13% probability in market pricing.
With inflation contained and oil prices declining, the Swiss National Bank is expected to leave rates unchanged at 0%.

A modest pullback has interrupted USD/CHF’s two-day advance, with the pair trading near 0.8330 in Thursday’s Asian session. However, support for the US Dollar (USD) from an increasingly hawkish Federal Reserve policy outlook could help the pair recover. That shift in the outlook follows stronger-than-expected US Consumer Price Index (CPI) inflation figures.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Expectations of a December rate increase have strengthened since Fed Governor Christopher Waller said earlier this week that he would back a quarter-point rise, or even a half-point increase should inflation worsen. The CME FedWatch Tool puts the market-implied probability of a December rate hike at 87%, with the chance of a larger 50-basis-point move at nearly 13%.

Can Fed independence and the Dollar’s lasting safe-haven role sustain support?

An improved backdrop for the USD reflects reduced concerns over Fed independence, according to Rabobank strategists, who say “diminished fears about political interference on the Fed is a supportive factor for the USD.” They also point to trading “at the start of the Gulf war,” when “strong demand for the USD undermined last year’s claims that the USD’s had lost at least part of its safe haven value,” as further evidence of the currency’s defensive qualities. They see the Dollar’s safe-haven role as structurally entrenched, describing its appeal as “linked to its embedded position in global payments systems, which could take decades to shake.”

For the Swiss National Bank (SNB), the broad expectation is that interest rates will remain at 0% at the forthcoming meeting. Markets have priced in a possible increase by early 2027, whereas most economists expect the first hike closer to late 2027.

With price pressures still contained, SNB Chairman Schlegel said the central bank had fulfilled its medium-term price stability mandate. He also noted that lower oil prices were further reducing inflation risks.

Swiss Franc: Frequently asked questions

Which factors shape movements in the Swiss Franc?

Among the world’s top ten most actively traded currencies, the Swiss Franc (CHF) is Switzerland’s official currency, with trading volumes far exceeding the size of the country’s economy. Broad market sentiment, Switzerland’s economic performance and decisions by the Swiss National Bank (SNB) are among the influences on its value. A peg linked the Swiss Franc to the Euro (EUR) between 2011 and 2015. Its abrupt removal sent the Franc’s value up by more than 20%, triggering market turmoil. Although that peg no longer applies, CHF movements remain closely correlated with those of the Euro because Switzerland’s economy relies heavily on the neighbouring Eurozone.

What gives the Swiss Franc its safe-haven status?

Investors often turn to the Swiss Franc (CHF) during periods of market stress, giving it a reputation as a safe-haven asset. Switzerland’s perceived standing underpins this appeal: economic stability, a strong export sector, substantial central bank reserves and a longstanding policy of neutrality in global conflicts make its currency attractive to investors seeking to avoid risk. During turbulent periods, CHF is therefore likely to appreciate against currencies regarded as riskier investments.

How can Swiss National Bank decisions move the Swiss Franc?

Monetary policy is set by the Swiss National Bank (SNB) at four meetings a year, one each quarter, a lower frequency than at other major central banks. Its objective is to keep annual inflation below 2%. If inflation exceeds the target, or is expected to do so in the foreseeable future, the SNB seeks to curb price rises by increasing its policy rate. The higher yields associated with higher interest rates generally support the Swiss Franc (CHF), as they make Switzerland more attractive to investors. Lower interest rates, by contrast, typically weigh on CHF.

What effect do economic releases have on the Swiss Franc?

Assessments of Switzerland’s economic health rely heavily on macroeconomic releases, which can also affect the Swiss Franc’s (CHF) valuation. Despite the economy’s generally stable nature, abrupt shifts in growth, inflation, the current account or the central bank’s currency reserves can trigger CHF movements. Strong growth, low unemployment and robust confidence usually support the currency. Data signalling a loss of economic momentum, on the other hand, is likely to lead to CHF depreciation.

Why does Eurozone monetary policy matter for the Swiss Franc?

Switzerland’s small, open economy depends heavily on the performance of its Eurozone neighbours. Its main economic partner and a key political ally is the broader European Union, making stable macroeconomic conditions and monetary policy in the Eurozone crucial for Switzerland and, in turn, the Swiss Franc (CHF). Reflecting these close links, some models place the correlation between movements in the Euro (EUR) and CHF at more than 90%, approaching a perfect correlation.