Swiss Franc weakens as fading US-Iran deal hopes lift the US Dollar

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USD/CHF edges higher on Monday as fading hopes for a near-term US-Iran peace deal underpin the US Dollar (USD) and keep the Swiss Franc (CHF) under pressure despite stronger-than-expected Swiss Gross Domestic Product (GDP) figures.

USD/CHF trades higher as fading optimism over a US-Iran deal supports the Greenback.
Elevated Oil prices strengthen expectations that the Fed may need to keep interest rates higher for longer.
Switzerland’s economy grew faster than expected in the first quarter, while manufacturing activity also improved.

Iran’s semi-official Tasnim News Agency reported that Tehran has suspended message exchanges with Washington over Israel’s military operations in Lebanon. The report comes as Israel expands its military offensive against Hezbollah in southern Lebanon.

Meanwhile, the United States and Iran exchanged fresh attacks over the weekend. The latest developments helped the US Dollar rebound after it came under pressure last week amid reports that Washington and Tehran had reached a preliminary 60-day memorandum of understanding (MOU).

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 99.33 after recovering from Friday’s two-week low near 98.75.

Oil prices also staged a sharp rebound and continue to stoke inflation concerns. West Texas Intermediate (WTI) Crude Oil is up more than 5% on Monday.

Higher energy costs are fueling expectations that the Federal Reserve (Fed) may need to raise interest rates to tackle inflation, pushing US Treasury yields higher.

In contrast, the SNB is expected to keep policy unchanged as Swiss inflation remains within the central bank’s 0–2% target range. Switzerland’s annual CPI, due on Thursday, is forecast to rise to 0.8% in May from 0.6% in April.

On the data front, the S&P Global US Manufacturing Purchasing Managers Index (PMI) rose to 55.1 in May from 54.5 in April, while the ISM Manufacturing PMI climbed to 54.0, marking its highest reading since May 2022.

Switzerland’s economy expanded by 0.7% QoQ in Q1, beating forecasts of 0.5% after growing 0.2% in the previous quarter. The SVME Manufacturing PMI rose to 57.3 in May from 54.5 in April.

SNB FAQs

What is the Swiss National Bank?

The Swiss National Bank (SNB) is the country’s central bank. As an independent central bank, its mandate is to ensure price stability in the medium and long term. To ensure price stability, the SNB aims to maintain appropriate monetary conditions, which are determined by the interest rate level and exchange rates. For the SNB, price stability means a rise in the Swiss Consumer Price Index (CPI) of less than 2% per year.

How does the Swiss National Bank interest-rate policy affect the Swiss Franc?

The Swiss National Bank (SNB) Governing Board decides the appropriate level of its policy rate according to its price stability objective. When inflation is above target or forecasted to be above target in the foreseeable future, the bank will attempt to tame excessive 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.

Does the Swiss National Bank intervene in the forex market?

Yes. The Swiss National Bank (SNB) has regularly intervened in the foreign exchange market in order to avoid the Swiss Franc (CHF) appreciating too much against other currencies. A strong CHF hurts the competitiveness of the country’s powerful export sector. Between 2011 and 2015, the SNB implemented a peg to the Euro to limit the CHF advance against it. The bank intervenes in the market using its hefty foreign exchange reserves, usually by buying foreign currencies such as the US Dollar or the Euro. During episodes of high inflation, particularly due to energy, the SNB refrains from intervening markets as a strong CHF makes energy imports cheaper, cushioning the price shock for Swiss households and businesses.

When does the Swiss National Bank Governing Council decide on monetary policy?

The SNB meets once a quarter – in March, June, September and December – to conduct its monetary policy assessment. Each of these assessments results in a monetary policy decision and the publication of a medium-term inflation forecast.