• USD/CHF edges lower after reaching a nearly 16-month high of 0.8263 on Wednesday.
• Fed Chair Warsh cited high inflation, with markets pricing a 49.8% probability of an October rate increase.
• Rabobank notes markets expect little risk of a Swiss National Bank rate hike this year, unlike other central banks.

USD/CHF inches lower after reaching nearly 16-month highs the previous day, trading around 0.8250 during the Asian hours on Thursday. However, the pair may rebound its ground as the US Dollar (USD) may appreciate further due to the potential for further policy tightening by the Federal Reserve (Fed).

The Greenback remains on a firm footing following an interest rate hike by the US Federal Reserve (Fed), alongside signals that another increase could follow before the end of the year. The central bank raised the federal funds rate by 25 basis points to a target range of 3.75% to 4.00%. The move matched market expectations, representing the Fed’s first interest rate increase in three years.

In his post-meeting remarks, Fed Chair Kevin Warsh explained that the rate hike was driven by inflation remaining “too high” and lingering “for too long,” describing the action as a “sober” and “responsible decision.” Warsh signaled that further rate increases remain on the table in an effort to curb persistent price pressures. Following the announcements, money markets priced in roughly a 49.8% probability of another Fed rate hike at the October meeting, according to the CME FedWatch tool.

Franc faces tug-of-war between funding currency role and safe haven demand

Rabobank’s FX strategists note that, “counter to many other G10 central banks, the market sees little risk of a SNB rate hike this year.” With the SNB policy rate still “at zero,” they argue this “raises the prospect of the CHF adopting funding currency status,” as investors look for low-yielding currencies to finance carry trades. However, Rabobank cautions that the market “would have to square this with the prospect that the CHF could see a surge in long positions if market anxieties rise,” underscoring that the Franc’s traditional safe haven appeal could quickly reassert itself in periods of heightened risk.