The USD/CHF pair has extended its rally, reaching its highest level since June last year at 0.8262, as the interest rate differential between the U.S. and Switzerland continues to widen. The pair has gained over 8.7% from its 2023 low, driven by the Federal Reserve's aggressive tightening and expectations that the Swiss National Bank (SNB) will keep rates unchanged.
SNB decision in focus
All eyes are on the SNB's monetary policy announcement on Thursday. Economists widely expect the central bank to hold its benchmark rate at 0%, a level it has maintained for years. The decision comes amid modest inflation in Switzerland, with the headline consumer price index (CPI) rising to 0.8% in August from 0.4% in July.
Inflation pressures are building due to the ongoing energy crisis in Europe. Diesel prices in Switzerland have surged to a record high of CHF 2.41 per liter, and petrol prices have also climbed, partly due to geopolitical tensions in the Middle East. Despite these pressures, the SNB is likely to keep rates unchanged to maintain a weaker franc, which supports the country's export-oriented economy.
Fed's hawkish stance boosts dollar
The U.S. dollar has been a key driver of the USD/CHF rally. Last week, the Federal Reserve, led by Chair Kevin Warsh, raised interest rates by 25 basis points to a range of 3.75%–4.00%. The central bank signaled further hikes this year to combat elevated inflation, with market participants pricing in another move in either October or December, which would bring rates to 4.00%–4.25%.
The widening gap between U.S. and Swiss interest rates has made the USD/CHF pair increasingly attractive for carry trade strategies. In a carry trade, investors borrow in a low-yielding currency like the Swiss franc and invest in a higher-yielding currency like the U.S. dollar, profiting from the interest rate differential.
Technical outlook
From a technical perspective, the USD/CHF pair has been trading within an ascending channel since February, when it bottomed at 0.7600. The recent rally pushed the pair to 0.8262, but it has since pulled back slightly, testing the support level at 0.8207, which was the high from July 29. The pair remains above its 50-day and 100-day moving averages, indicating a bullish trend.
If the pair breaks above the upper boundary of the channel at 0.8300, it could target the next resistance at 0.8350. Conversely, a failure to hold above 0.8207 might lead to a deeper correction, but the overall bias remains upward as long as the rate differential persists.
Investors will closely watch the SNB's statement for any hints about future policy, but the central bank is expected to maintain its accommodative stance, which could further support the USD/CHF upside. Meanwhile, the Fed's commitment to fighting inflation continues to underpin the dollar.
For more on currency markets, see our analysis on USD/ZAR ahead of the SARB decision and the latest on UK inflation and BoE rate hike odds.
This article is for informational purposes only and does not constitute financial advice.
