- Swiss CPI drops to 0.4%, signaling minimal energy cost pass-through.
- SNB Monetary policy projected to remain unchanged through the end of the year.
- Markets price in a 65% chance of a September 25-bps rate increase.
USD/CHF moves little after two days of gains, trading around 0.8100 during the Asian hours on Tuesday. The currency pair may appreciate further as the Swiss Franc (CHF) faces headwinds from easing domestic inflation.
Swiss CPI slowed to 0.4% in July, down from 0.5% in the previous month to hit its lowest level in four months. This slowdown underscores a limited pass-through from higher geopolitical energy prices, contrasting with the Swiss National Bank’s (SNB) expectations of a modest near-term inflation pickup following its decision to hold policy rates at 0%.
Franc under pressure as SNB keeps rates at zero
Strategists at Brown Brothers Harriman highlight that “Swiss July CPI stays muted,” underscoring the absence of inflationary pressure in the economy. In their view, 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.” They note that against this backdrop of subdued price dynamics and a firmly anchored policy rate, “CHF is the worst performing G10 currency so far this quarter.”
Looking ahead, the SNB is anticipated to keep borrowing costs unchanged through year-end; additional rate cuts remain a contingency plan rather than a base case, particularly given the absence of severe stress within the Swiss banking sector.
Meanwhile, price action in the pair remains muted as the US Dollar (USD) stabilizes amid ongoing diplomatic uncertainty. Tensions rose after US President Donald Trump characterized his offer for discussions with Iran as a “last chance,” following his decision to call off a major military strike. Iranian leadership swiftly dismissed the proposal, with General Mohsen Rezaei, an advisor to Iran’s Supreme Leader, rejecting the conditions and asserting that Iran will not permit a second corridor in the Strait of Hormuz.
Meanwhile, market participants are continuing to recalibrate their monetary policy expectations following the Fed’s decision to hold interest rates steady in July. According to the CME FedWatch tool, traders are currently pricing in roughly a 65% probability of a 25-basis-point rate hike at the Federal Reserve’s upcoming September meeting.
