The USD/CHF currency pair reports its first weekly loss in five weeks after weaker-than-expected US non-farm payrolls (NFP) data released on Thursday weighed on the US dollar (USD). The pair gains value on Friday as the dollar stabilizes and investors reassess the outlook for Federal Reserve (Fed) interest rates.
At the time of writing, the USD/CHF rate is virtually unchanged around 0.8034, having hit an intraday low of 0.8010. The US Dollar Index (DXY), which tracks the dollar against a basket of six major currencies, is trading around 100.84, off an intraday low of 100.61.
The lack of further selling of the US dollar (USD) following the tender NFP print suggests that the data only delayed expectations for Federal Reserve (Fed) interest rate increases.
Traders continue to expect monetary policy to remain tight as inflation remains above the central bank’s 2% target, after accelerating in recent months on higher oil prices.
According to the CME FedWatch Tool, investors estimate the probability of a rate hike at the September meeting at 53%, up from 63% before the NFP release, while the probability of a rate hike in December remains elevated at 76%.
However, the June Consumer Price Index (CPI) report, due later this month, is likely to provide greater clarity on the Fed’s interest rate path, with reduced risks of energy-fueled inflation as oil prices have recovered most of the gains sparked by the U.S.-Iran war.
Meanwhile, US dollar weakness may remain shallow, limiting stronger gains for the Swiss franc (CHF).
On the Swiss side, low inflation supports the view that the Swiss National Bank (SNB) will maintain its current policy stance of keeping interest rates at 0%. Meanwhile, the central bank continues to warn against excessive strength of the Swiss franc and remains ready to intervene in the currency market if necessary.
Looking ahead to next week, investors will focus on data from the U.S. ISM Purchasing Managers’ Index (PMI) and then the minutes from the Fed’s latest policy meeting. The Swiss economic calendar remains empty.
Frequently asked questions about inflation
Inflation measures the enhance in prices of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a monthly (m/m) and annual (y/y) basis. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on, and it is the level aimed at by central banks, which are required to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (m/m) and year-on-year (y/y) basis. Core CPI is the figure that central banks target because it does not include variable spending on food and fuel. When core CPI rises above 2%, it typically results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite situation occurs when inflation falls.
While it may seem counterintuitive, high inflation in a country causes the value of its currency to enhance, and vice versa for lower inflation. This is because the central bank usually raises interest rates to combat higher inflation, which attracts more capital inflows from around the world from investors looking for a lucrative place to put their money.
Historically, gold was the asset that investors turned to in times of high inflation because it held its value, and while investors will often continue to buy gold for its protected haven property in times of extreme market turmoil, in most cases this is not the case. This is because when inflation is high, central banks raise interest rates to combat it. Higher interest rates are bad for gold because they enhance the opportunity cost of holding gold compared to interest-bearing assets or putting your money in a deposit account. On the other hand, lower inflation is usually good for gold because it lowers interest rates, making the vivid metal a more viable investment alternative.
