The USD/CHF pair appreciated on Thursday, advancing near the 0.8550 level during the European session, bolstered by diminishing expectations of an aggressive rate cut by the Federal Reserve (Fed) in September.
This marks the second consecutive session of gains for the pair, supported by rising US Treasury yields and improved demand for the US Dollar (USD).
Fed Rate Cut Speculation Softens After US Inflation Data
The likelihood of a substantial rate cut by the Fed has been tempered following August’s inflation report. The US Consumer Price Index (CPI) revealed that headline inflation had cooled to a three-year low, with the annual CPI dropping to 2.5% from July’s 2.9%.
The core CPI, excluding volatile food and energy prices, held steady at 3.2% year-over-year, slightly exceeding market expectations.
This softer inflation data has shifted the outlook for Fed rate policy, reducing the odds of a 50 basis point (bps) cut.
According to the CME FedWatch Tool, the probability of such a move has dropped to just 15%. Instead, markets are now pricing in a 25 bps cut, which has lifted US Treasury yields and offered support to the USD/CHF pair.
Swiss Inflation and Yield Decline Weigh on the Franc
On the Swiss side, inflationary pressures have also eased, with August’s Swiss inflation falling to 1.1%. This has sparked renewed speculation about a potential rate cut by the Swiss National Bank (SNB) in the coming months.
The yield on the Swiss 10-year government bond fell below 0.4%, marking a three-week low, which further weakened the Swiss Franc (CHF).
Market participants are now expecting the SNB to deliver a 25 bps rate cut at its September meeting, with an anticipated total reduction of 55 bps by the end of 2024.
Technical Outlook for USD/CHF
Currently trading at 0.85469, USD/CHF is displaying bullish momentum after breaking key Fibonacci levels. If this trend continues, the pair could target the next resistance at 0.85763.
Immediate support lies at 0.85202, with the 50-period EMA providing additional backing at 0.84879. Keep an eye on the MACD, which shows a slight bullish crossover, suggesting potential for further gains. However, traders should exercise caution as the pair approaches key resistance zones.