USD/CHF returns above 0.7970 with all eyes on the Fed

Investors await a Fed rate cut

Futures markets are practically fully pricing a 25 basis points rate cut, which would leave the Federal Funds rate at s three-year low in the 3.75%-4.0% range. Investors will also be looking for some validation of their bets on further rate cuts in December. In this sense, the risk is that a hawkish press release by Fed Chairman Jerome Powell might send the US Dollar rallying.

Beyond that, there is growing speculation that the central bank might signal the closure of its balance sheet reduction programme, the so-called quantitative tightening, to support commercial banks amid signs that credit conditions are deteriorating.

Apart from that, the US President's tour through Asia has been contributing to support a moderate risk appetite ahead of the key meeting with Chinese President Xi Jinping on Thursday. Comments from Trump have been positive so far, although the Chinese Foreign Ministry comments urging the US to take actions to keep supply chains stable have soured the market mood somewhat.

In Switzerland, the ZEW economic expectations survey, released earlier on Wednesday, has shown an improvement to a reading of -7.7 in October, from the -46.4 reading seen in September.

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.