Dollar Gains on Swiss Franc as Oil Revives Fed Hike Fears

Key Moments

USD/CHF Supported by Oil-Driven Yield Move

USD/CHF continued its upward move for a second consecutive day, trading near 0.8110 in early European dealings on Tuesday. The pair strengthened as the US Dollar recovered earlier intraday losses, helped by a sharp rally in crude oil that was linked to rising geopolitical tensions.

The upswing in energy prices pushed US Treasury yields higher, reviving worries that the Federal Reserve could be compelled to raise interest rates sooner than previously anticipated, despite signs of a cooling labor market. As a result, investors turned their attention to upcoming US inflation releases for clearer policy guidance.

According to the CME FedWatch Tool, market participants were assigning nearly a 52% probability to a 25-basis-point rate increase in September, up from 44.4% just one day earlier.

Analysts See High Bar for September Fed Action

Strategists at OCBC cautioned that inflation dynamics still pose a meaningful hurdle for a Federal Reserve move in September. They stated that “core CPI would need to print at 0.3% MoM or higher in July, above the 0.2% consensus forecast, to materially lift expectations of a September rate hike.”

OCBC further commented that a “range-bound USD, combined with a constructive risk backdrop, should continue to support carry trades despite ongoing volatility in oil markets.” They also noted that “oil prices eased on hopes that the Strait of Hormuz could reopen, but Iran’s firm conditions for Washington suggest any near-term boost to energy supply is likely to be limited,” which, in their assessment, has restrained expectations for a deeper or more durable decline in energy prices.

Fed’s Hammack Signals Need for More Tightening

The policy tone from the Federal Reserve added to the hawkish backdrop. Cleveland Fed President Beth Hammack underlined that the central bank will likely have to implement multiple additional rate increases to firmly contain broad-based inflation pressures.

In an interview with Yahoo Finance, Hammack – who dissented at the July policy meeting in favor of an immediate rate hike – argued that the current stance of monetary policy is still not restrictive enough. She described the upcoming Consumer Price Index release as a key test that will shape the Fed’s policy course from here.

Swiss Inflation Undershoots SNB Expectations

On the Swiss side, inflation eased to a four-month low of 0.4% year-over-year in July, down from 0.5% in the prior month. The data suggested very limited transmission of global energy price shocks into domestic prices.

The decline ran counter to the Swiss National Bank’s earlier expectation for a slight increase in inflation after it left its policy rate unchanged at 0%. Supported by what is described as a resilient banking sector, the SNB is widely anticipated to keep rates steady through the remainder of the year, treating any future cuts as a secondary option rather than the main policy trajectory.