The Swiss Franc (CHF) remains under pressure against the US Dollar (USD), with the USD/CHF pair trading just below 0.8200 and on track for a 1.3% monthly gain, marking its highest level in 13 months [1]. This comes despite a notable improvement in Swiss economic sentiment, as the ZEW Economic Expectations Index surged to 10 in July, up from -25 in June and -11 in May, reaching its best reading since November of the previous year [1].
The positive shift in Swiss economic expectations has been overshadowed by monetary policy divergence between the Swiss National Bank (SNB) and the US Federal Reserve (Fed). While the SNB is not expected to raise its benchmark interest rate from the current 0% level in the foreseeable future, markets are increasingly pricing in the likelihood of Fed tightening, with a one-in-three chance of a quarter-point rate hike at the upcoming Federal Open Market Committee (FOMC) meeting [1].
Strategists at Rabobank note that market expectations now fully price a 25 basis point hike at the Fed's September meeting, with another hike anticipated for March next year. However, they caution that this market stance is not aligned with their own baseline, stating that few actually expect the Fed to raise rates at the current meeting, though some FOMC members may dissent in favor of a hike [1].
The combination of improved Swiss economic sentiment and persistent monetary policy divergence has left the Swiss Franc vulnerable, as rising bets on Fed tightening continue to support the US Dollar [1].
CONCLUSION
Despite a sharp rebound in Swiss economic expectations, the Swiss Franc remains weak due to expectations of further US monetary tightening and a dovish SNB stance. Market participants are closely watching the Fed's next moves, with the USD/CHF pair reflecting ongoing policy divergence. The CHF is likely to remain under pressure unless the SNB signals a shift in its interest rate policy.