Swiss Franc Gains as Markets Discount Near-Term Fed Hike

Key Moments

Dollar Weakness Pushes USD/CHF Lower

USD/CHF is under pressure in Asian trading on Monday, hovering near 0.8090 and giving back the modest gains recorded in the previous session. The pair is sliding as the US Dollar (USD) softens following comments from Goldman Sachs chief economist Jan Hatzius, who reaffirmed his view that the Federal Reserve (Fed) is likely to keep rates unchanged in September.

Hatzius maintained that the hawkish tone from Federal Reserve Chair Kevin Warsh at Jackson Hole would translate into a rate increase only if the August Consumer Price Index (CPI) and Producer Price Index (PPI) prints were to surprise significantly to the upside – an outcome Goldman Sachs does not consider likely.

Warsh Highlights Persistent Inflation Risks

Fed Chair Warsh adopted a distinctly more hawkish posture at Jackson Hole, reflected in an FXS Speechtracker score of 7.4/10 compared with a historical average of 6.5/10, signaling elevated concern over price stability. His insistence that the Fed must be assured that underlying inflation is converging toward the 2% Personal Consumption Expenditures (PCE) target, “or we have work to do,” alongside his assessment that financial conditions are not restrictive and that credit and loan markets show limited evidence of policy restraint, points to a bias toward additional tightening or a sustained restrictive stance.

Warsh also stressed that recent better-than-expected summer inflation readings do not yet indicate a meaningful shift in underlying dynamics, keeping the focus firmly on inflation risks. This stance is viewed as supportive for the Dollar and modestly negative for risk-sensitive assets.

Market Reprices September Fed Meeting

Following Warsh’s comments, market expectations for the Fed’s September 15-16 policy decision have shifted notably. Data from the CME FedWatch tool show traders now assigning nearly a 57.5% probability to at least a 25 basis point rate hike next month, a sharp increase from 35% before Warsh’s Jackson Hole speech.

SNB Holds at 0% as Markets Eye Distant Hike Prospects

The Swiss National Bank (SNB) has kept its key policy rate at 0% and is projected to maintain this level through 2027. The central bank reiterated that it remains prepared to intervene in the foreign exchange market to curb excessive appreciation of the Swiss Franc.

While most economists do not anticipate a rate increase until early 2028, market pricing suggests a non-negligible probability of a hike as soon as March 2027. This prospective path supports the Franc’s role as a funding currency in carry trades.

Subdued Swiss Inflation Supports Extended SNB Pause

Strategists at Brown Brothers Harriman (BBH) anticipate that Switzerland’s August inflation data will stay muted, giving the SNB further scope to keep policy settings unchanged. BBH expects “headline CPI … at 0.5% y/y vs. 0.4% in June, tracking slightly below the Swiss National Bank’s (SNB) forecast of 0.6% y/y in Q3,” while “core CPI is expected at 0.3% y/y for a fifth straight month.”

In their assessment, the “bottom line” is that “the SNB has plenty of room to keep rates at 0.00% for some time, which is an ongoing drag for CHF,” with the Franc currently “the worst performing G10 currency so far this quarter.”

Swiss Franc: Structure, Drivers, and Policy Dynamics

What key factors drive the Swiss Franc?

The Swiss Franc (CHF) is Switzerland’s official currency. It is among the top ten most traded currencies globally, reaching volumes that well exceed the size of the Swiss economy. Its value is determined by the broad market sentiment, the country’s economic health or action taken by the Swiss National Bank (SNB), among other factors. Between 2011 and 2015, the Swiss Franc was pegged to the Euro (EUR). The peg was abruptly removed, resulting in a more than 20% increase in the Franc’s value, causing a turmoil in markets. Even though the peg isn’t in force anymore, CHF fortunes tend to be highly correlated with the Euro ones due to the high dependency of the Swiss economy on the neighboring Eurozone.

Why is the Swiss Franc considered a safe-haven currency?

The Swiss Franc (CHF) is considered a safe-haven asset, or a currency that investors tend to buy in times of market stress. This is due to the perceived status of Switzerland in the world: a stable economy, a strong export sector, big central bank reserves or a longstanding political stance towards neutrality in global conflicts make the country’s currency a good choice for investors fleeing from risks. Turbulent times are likely to strengthen CHF value against other currencies that are seen as more risky to invest in.

How do decisions of the Swiss National Bank impact the Swiss Franc?

The Swiss National Bank (SNB) meets four times a year – once every quarter, less than other major central banks – to decide on monetary policy. The bank aims for an annual inflation rate of less than 2%. When inflation is above target or forecasted to be above target in the foreseeable future, the bank will attempt to tame 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.

How does economic data influence the value of the Swiss Franc?

Macroeconomic data releases in Switzerland are key to assessing the state of the economy and can impact the Swiss Franc’s (CHF) valuation. The Swiss economy is broadly stable, but any sudden change in economic growth, inflation, current account or the central bank’s currency reserves have the potential to trigger moves in CHF. Generally, high economic growth, low unemployment and high confidence are good for CHF. Conversely, if economic data points to weakening momentum, CHF is likely to depreciate.

How does the Eurozone monetary policy affect the Swiss Franc?

As a small and open economy, Switzerland is heavily dependent on the health of the neighboring Eurozone economies. The broader European Union is Switzerland’s main economic partner and a key political ally, so macroeconomic and monetary policy stability in the Eurozone is essential for Switzerland and, thus, for the Swiss Franc (CHF). With such dependency, some models suggest that the correlation between the fortunes of the Euro (EUR) and the CHF is more than 90%, or close to perfect.