USD/CHF Forecast: Fed signals could tip SNB into negative rates

The market anticipates the Federal Reserve will hold rates steady this week, signaling two cuts in 2025, while the Swiss National Bank (SNB) is expected to cut rates by 25bp, although a larger 50bp cut is possible given negative Swiss inflation and a stronger franc; this divergence could support USD/CHF if the SNB surprises dovishly. Recent strengthening of the correlation between U.S.-Swiss interest rate differentials and USD/CHF suggests monetary policy decisions will significantly influence the franc, with markets underpricing the risk of the SNB returning to negative rates.

Analysis

Upcoming central bank decisions are poised to significantly influence USD/CHF. The market anticipates the Federal Reserve will maintain current policy rates this week and signal intentions for two rate cuts in 2025, as stated in the article's initial summary. However, more detailed market pricing discussed later in the text indicates two cuts are factored in by the end of 2024. The Fed's stance will be crucial, as recent U.S. inflation undershoots and a softening labor market counter concerns over tariffs and energy prices, making a continued signal for easing more probable than a hawkish shift. Concurrently, the Swiss National Bank (SNB) is expected to implement a 25 basis point rate cut. There is a considerable, and potentially underpriced, risk of a larger 50bp reduction, which would take its policy rate below zero for the first time since 2022; markets currently assign this a roughly one-in-four probability. This potential for a more aggressive SNB move is supported by Switzerland's recent -0.1% year-over-year inflation, a franc that has strengthened markedly since March (USD/CHF from 0.96 to 0.94, EUR/CHF from 0.88 to 0.8150), its trade-exposed economy, and the SNB's infrequent meeting schedule. The SNB's March inflation forecast, projecting a trough at 0.3% this quarter, now appears challenged by deflationary realities. Notably, the correlation between U.S.-Swiss interest rate differentials and USD/CHF movements has recently intensified, with correlation coefficients for 2, 5, and 10-year bond yield spreads at 0.84, 0.90, and 0.93 respectively, indicating high sensitivity of the currency pair to monetary policy divergence. Technically, USD/CHF has shown resilience, failing to break its April low around 0.8040 despite recent risk-off episodes, hinting at a potential near-term bottom. Key resistance levels are identified at 0.8160 and 0.8246 (near the 50-day moving average), while a breach of Friday's low at 0.8056 would re-target the 0.8040 April support.

Key Decisions for Investors

• Investors should closely evaluate the SNB's decision, as a 50bp cut, which the article suggests is underpriced by markets given Switzerland's negative inflation and strong franc, could trigger significant CHF depreciation and upward momentum in USD/CHF.
• The Federal Reserve's forward guidance is paramount; a confirmation of its easing trajectory, whether for 2025 or reinforcing market pricing for two cuts in 2024, is likely to exert downward pressure on the U.S. dollar, significantly impacting USD/CHF dynamics due to the heightened rate differential correlation.
• For those trading USD/CHF, it is prudent to monitor technical levels closely around the central bank announcements, specifically the support near the April low of 0.8040 and resistance points at 0.8160 and 0.8246, as these could define near-term price action.
• Consider the scenario where the SNB delivers only the widely expected 25bp cut; given the arguments for more aggressive action, this could be perceived as hawkish relative to underlying conditions and potentially lead to further CHF appreciation, pressuring USD/CHF lower.