USD/CHF clings to gains near 0.7730 ahead of US ISM PMI data

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The USD/CHF pair holds onto Friday’s gains near 0.7730 during the European trading session on Monday. The Swiss Franc pair trades firmly as the US Dollar (USD) clings to Kevin Warsh’s nomination for the Federal Reserve’s (Fed) new Chairman-led gains.

USD/CHF trades firmly near 0.7730 on Kevin Warsh’s nomination as the Fed's new Chairman.
The US Dollar is expected to trade cautiously ahead of the US NFP data on Friday.
Risk-off market mood has improved the Swiss Franc’s appeal.

At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades broadly calm near its weekly high of 97.33.

On Friday, the announcement of former Fed Governor Kevin Warsh as the new Fed Chairman by United States (US) President Donald Trump led to a sharp upside in the US Dollar. The Greenback gained on expectations that Warsh will not support aggressive interest rate cuts in his tenure, given his historic preference for a firmer US Dollar in his previous work at the Fed.

Going forward, the US Dollar is expected to trade with caution as the US Nonfarm Payrolls (NFP) data for January is due for release on Friday. Investors will pay close attention to the labor market data to get fresh cues on the US interest rate outlook. Currently, the Fed is expected to hold interest rates steady in the policy meeting in March, according to the CME FedWatch tool.

In Monday’s session, market participants will focus on the US ISM Manufacturing Purchasing Managers’ Index (PMI) data for January, which will be published at 15:00 GMT. The data is expected to show that the Manufacturing PMI contracted again, but improved to 48.3 from 47.9 in December.

Meanwhile, the Swiss Franc (CHF) trades broadly stable in a risk-off market mood.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.