Swiss Franc eyes first weekly gain in five weeks as weak NFP delays Fed hikes

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USD/CHF heads for its first weekly loss in five weeks as weaker-than-expected US Nonfarm Payrolls (NFP) data released on Thursday weighed on the US Dollar (USD). The pair rebounds on Friday as the Greenback stabilizes, with traders reassessing the Federal Reserve's (Fed) interest rate outlook.

USD/CHF rebounds on Friday but remains on track for its first weekly loss in five weeks.
Weak US NFP data delays expectations of Fed rate hikes, weighing on the US Dollar.
Markets shift focus to next week's US ISM Services PMI and Fed meeting minutes.

At the time of writing, USD/CHF is trading virtually unchanged around 0.8034 after touching an intraday low of 0.8010. The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading around 100.84, recovering from an intraday low of 100.61.

The lack of follow-through selling in the US Dollar (USD) after the weak NFP print suggests the data merely delayed expectations of Federal Reserve (Fed) interest rate hikes.

Traders continue to expect monetary policy to remain restrictive as inflation remains above the central bank's 2% target after accelerating in recent months, driven by higher Oil prices.

According to the CME FedWatch Tool, traders are pricing in a 50% probability of a rate hike at the September meeting, down from 63% before the NFP release, while the probability of a December rate hike remains elevated at 76%.

However, the June Consumer Price Index (CPI) report due later this month is likely to provide greater clarity on the Fed's interest rate path, with energy-driven inflation risks easing as Oil prices have retraced most of the gains triggered by the US-Iran war.

In the meantime, the US Dollar's pullback may remain shallow, limiting stronger gains in the Swiss Franc (CHF).

On the Swiss side, the low-inflation backdrop supports the view that the Swiss National Bank (SNB) will maintain its current policy stance, keeping interest rates at 0%. Meanwhile, the central bank continues to warn against excessive strength in the Swiss Franc and remains ready to intervene in the foreign exchange market if necessary.

Looking ahead to next week, traders will focus on the US ISM Services Purchasing Managers Index (PMI) data, followed by the minutes of the Fed's latest policy meeting. The Swiss economic calendar remains empty.

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.

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