- USD/CHF rises as the US Dollar erases losses following an oil rally driven by geopolitical tensions.
- Rising energy prices and Treasury yields stoked fears of early Fed rate hikes despite a cooling labor market.
- Swiss inflation unexpectedly dropped to a four-month low of 0.4% in July, defying Swiss National Bank expectations.
USD/CHF extends its gains for the second successive day, trading around 0.8110 during the early European hours on Tuesday. The currency pair has pushed higher as the US Dollar (USD) erased its intraday losses, fueled by a sharp rally in crude oil driven by heightened geopolitical tensions.
This surge in energy prices has dragged Treasury yields upward, stoking market fears that the Federal Reserve (Fed) might be forced to hike interest rates sooner than expected, even as the labor market continues to cool. Consequently, investors are sharply focused on this week’s inflation metrics for clearer policy signals, with the CME FedWatch Tool now pricing in nearly 52% probability of a 25-basis-point rate hike in September, up from 44.4% just a day ago.
USD seen rangebound as Fed hike bar stays high and oil gains capped
Analysts at OCBC argue that the inflation hurdle for a September Fed move remains significant, noting that “core CPI would need to print at 0.3% MoM or higher in July, above the 0.2% consensus forecast, to materially lift expectations of a September rate hike.” In their view, a “range-bound USD, combined with a constructive risk backdrop, should continue to support carry trades despite ongoing volatility in oil markets.” They add that recent “oil prices eased on hopes that the Strait of Hormuz could reopen, but Iran’s firm conditions for Washington suggest any near-term boost to energy supply is likely to be limited,” tempering expectations for a sustained pullback in energy prices.
Adding to the hawkish momentum, Cleveland Fed President Beth Hammack emphasized that the central bank will likely need to execute multiple rate hikes to get broad-based inflation under control. Speaking with Yahoo Finance, Hammack, who notably dissented at the July meeting in favor of an immediate hike, argued that current policy remains insufficiently restrictive. She highlighted the upcoming Consumer Price Index report as a pivotal test that will dictate the Fed’s trajectory moving forward.
In contrast, Swiss inflation cooled to a four-month low of 0.4% year-over-year in July, falling from 0.5% in the previous month and showing remarkably little pass-through from global energy price shocks. The unexpected drop defied the Swiss National Bank’s expectations for a minor inflationary uptick after holding its policy rate at 0%. Bolstered by a resilient banking sector, the SNB is widely expected to keep rates on hold through the end of the year, treating additional rate cuts as a fallback option rather than the primary path.
