Swiss Franc strengthens as softer US inflation pressures US Dollar

• Softer US inflation and flat wholesale prices weigh on the US Dollar.
• Federal Reserve rate hike expectations for September drop to nearly 35%.
• Swiss inflation cools to 0.4%, though SNB rate hikes remain priced in long-term.

USD/CHF halts its four-day winning streak, trading around 0.8140 during the Asian hours on Friday. The currency pair edges lower as the US Dollar (USD) faces downward pressure following a softer-than-expected US inflation report.

Market attention is now turning toward the upcoming US July Retail Sales data scheduled for release later in the day. Adding to the broader inflation picture, the Bureau of Labor Statistics reported that US wholesale costs for goods and services were flat in July, cooling more than the anticipated 0.2% growth, after a revised 0.1% decline in June. Excluding volatile food and energy components, the core Producer Price Index (PPI) rose 0.2%, coming in slightly below market consensus expectations of 0.3%. On an annual basis, headline PPI climbed 4.7% year-over-year in July, while core PPI increased by 4.2% over the same period.

These cooling inflation metrics have shifted expectations regarding Federal Reserve policy. According to the CME FedWatch Tool, markets are now pricing in a 34.8% probability of a U.S. rate hike at the upcoming September meeting, down from 40% immediately following the PPI data release.

Meanwhile, inflation pressures in Switzerland have also eased. Swiss inflation dropped to 0.4% in July from 0.5%, its lowest level in four months, highlighting the limited pass-through from higher energy prices linked to geopolitical tensions. This lower reading contrasts with the Swiss National Bank’s (SNB) expectation of a modest near-term pickup in inflation, which followed its recent decision to hold its policy rate at 0%.

The SNB is widely expected to leave borrowing costs unchanged throughout the year, treating further cuts as a contingency rather than the baseline scenario, given that Swiss banks have suffered no severe damage. While most economists do not foresee the first SNB rate hike until early 2028, currency markets continue to price in an increase as early as March 2027.

Franc softness seen persisting as SNB keeps inflation risks in check

Analysts at OCBC note that “near-term inflation risks remain limited,” even as the recent depreciation of the Swiss Franc could eventually feed through via higher imported prices. They judge that any such impact “is unlikely to be felt for at least another two quarters,” and stress that domestic price pressures “remain subdued and below the midpoint of the SNB’s 0-2% price stability range,” reinforcing expectations that the SNB can afford to stay patient on policy and tolerate further Franc weakness.

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