Swiss Franc gains as US Dollar eases on Fed Chair Warsh's remarks

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USD/CHF trims gains on Wednesday as remarks from Federal Reserve (Fed) Chair Kevin Warsh weigh modestly on the US Dollar (USD). However, expectations for a Fed rate hike and a lack of clarity surrounding US-Iran negotiations keep the Greenback's downside contained.

USD/CHF trims gains as Fed Chair Warsh's remarks weigh modestly on the US Dollar.
Fed rate hike bets and slow progress in US-Iran peace talks limit the Greenback's downside.
Swiss Retail Sales beat forecasts, while focus shifts to Swiss CPI and US jobs data.

At the time of writing, the pair is trading around 0.8086, retreating from an intraday high of 0.8117.

Speaking at the ECB Forum in Sintra on Wednesday, Fed Chair Kevin Warsh said, "We're not going to give forward guidance," adding, "We'll chart a new course so we can make better decisions." Wrash also noted that "inflation risks have come down."

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is trading around 101.27, just below the more than one-year high of 101.80 touched last week.

The United States and Iran reached a 60-day Memorandum of Understanding (MoU) last month, but progress toward a final peace agreement remains slow. Although US and Iranian envoys have arrived in Doha, Qatar, no direct talks between the two sides are currently scheduled.

On the monetary policy front, traders expect that the Fed could raise interest rates as soon as September, with markets pricing in a 67% probability of a rate hike, according to the CME FedWatch Tool.

Rate hike expectations gained traction after the economic fallout from the US-Iran war pushed US Consumer Price Index (CPI) inflation to 4.2% in May, more than double the Fed's 2% target. While Oil prices have retraced to pre-war levels, markets continue to expect tighter monetary policy after Fed Chair Warsh emphasized the need to restore price stability.

On the data front, the ADP Employment Change report showed that private payrolls increased by 98K in June, below market expectations of 113K and down from the 122K increase recorded in May. Traders now await the ISM Manufacturing Purchasing Managers Index (PMI) later in the American session, followed by Thursday's US Nonfarm Payrolls (NFP) report for further clues on the Fed's policy outlook.

Meanwhile, Switzerland's Retail Sales rose 3.5% YoY in May, accelerating from 1.7% in April and beating market expectations of 0.8%. Traders now look ahead to the Swiss CPI and the Swiss National Bank's (SNB) Financial Stability Report, due on Thursday.

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.