USD/CHF Upbeat on Monetary Policy Dynamics but Hurdles Loom

USD/CHF Analysis

The Swiss National Bank was the first major institution to begin lowering rates with the March pivot, but adopted a relatively cautious stance, having delivered three cuts of 25 basis points each. Its US counterpart may have been late to the easing cycle, but did it emphatically, with an outsized 0.5% move last month. The positive impact on USD/CHF from the SNB's lead went away on anticipation of bold Fed easing and the pair comes from five straight losing months.

However, policy dynamics are turning again in its favor. After the SNBs last timid cut, Inflation in Switzerland fell below 1% y/y and the lowest levels in more than three years, while unemployment rose to three year highs. These data along with the Franc's appreciation, strengthen the case for a larger cut by Swiss officials and/or FX intervention.

At the same time, price pressures in the US are more persistence with Core CPI rising to 3.3% y/y and marking the first uptick since March. Furthermore, the latest jobs report surprised to the upside and showed that the labor market remains robust. After last month's jumbo pivot, many officials have adopted a more cautious stance around the pace of easing, like Mr Bostic who opened the door to a pause during in a Wall Street Journal interview. ^[1]

These developments helped USD/CHF to regain the initiative, moving back above the EMA200 and rising around 2% this month. It now eyes the 38.2% Fibonacci of the May-September drop, but greater upside has a higher degree of difficulty.

Despite the cautious shift by the Fed, officials are still on track to deliver another 50 bps of cuts this year and has a long road to neutral. The SNB on the other hand, likely has limited runway with rates already at 1%.

On the technical front, the falling daily Ichimoku cloud and the descending trendline from the 2024 peak can contain the recovery, while the RSI has not followed prices higher in a divergence that can sent USD/CHF lower. A return below the EMA200 (black line) would shift bias to the downside and bring the 2023 multi-year lows in the spotlight but a breach is not easy under current conditions.