USDCHF has slowed down on its bullish trend after touching the resistance level at $0.9589. The bulls seemed to be taking profits ahead of the Consumer Price Index (CPI) report to be released. The CPI report is essential to investors as it gives a trusted measure of the inflation rate.
The dollar index returned above 106 yesterday, favoured by market sentiment. Escalating tensions between the US and China yesterday pushed investors into becoming risk-averse.
US House Speaker – Nancy Pelosi visited Taiwan yesterday to support their local government and relationship with the US against the wishes of China. This comes in after the Chinese government has issued several warnings on the consequences of this visit which the Speaker ignored. Investors fear possible US sanctions on China based on threats against this visit. This has changed investors’ sentiment and pushed many backs to the US dollar as the safe haven yesterday.
An essential factor to further determine the direction for USDCHF is the NFP data to be released on Friday. This will show the progress made so far by the US in job creation. Improved job creation is known to favour the US dollar. We have also discussed the effects of this on USDCHF in the paragraphs below.
What impact will the CPI report have on USDCHF?
The Consumer Price Index (CPI) is an important economic data that measures the inflation rate. It provides reliable data on the inflation rate by measuring the change in the prices of goods and services offered to consumers. The data obtained from the CPI is always critical to investors as rising inflation pushes the central bank to embark on aggressive interest rate hikes to rescue the currency value.
CPI data for the Swiss Franc (CHF) in July is critical as the Swiss National Bank (SNB) determines whether to embark on a second interest rate hike in September.
Judging from the previous reading of the CPI, the Swiss inflation rate reached a 29-year high with a record of 3.4%YoY in June, much higher than the usual expectation and forecast. The high level attained at 3.4% also marked the first time Switzerland’s inflation rate achieved such a high level above 3% since 2008.
This caused the Swiss National Bank (SNB) to take drastic measures earlier in June, raising its interest rate from -0.75% to -0.25% in the same month. This was the first time the Swiss Monetary Policy Committee raised its interest rate since 2007. Thus, the SNB has left its interest rate untouched for the past fifteen years at a negative rate.
During the last meeting, the SNB Chairman – Thomas Jordan affirmed that continued inflationary pressure would lead to further monetary policy tightening to restore prices to a stable position. Jordan believed rising inflation had given room to pull the interest rate further to fix the inflation rate to the SNB target of 0 – 2%. In his words:
“We published a new inflation forecast. If you interpret it correctly, you see that there’s a certain need probably to tighten further,”
The primary cause of Swiss inflation came from the high cost of oil and vegetables. The core inflation rate, which excludes food and energy, rose to 1.9% in June.
Therefore, the CPI report for the Swiss Franc (CHF) for the just concluded month of July remains very decisive.
Higher reading from the CPI data would temporarily devalue the Swiss Franc (CHF) until the interest rate is hiked again in September. The forecast for this data is -0.1% MoM, while the previous record was 0.5% MoM.
Would the NFP report on Friday impact USDCHF?
The NFP report to be released this Friday is also important economic data that directly impacted the strength of the US dollar and indirectly on every other pair crossed with the US dollar in the forex market.
An increase in the dollar strength will signal a bullish trend for USDCHF. In contrast, a decrease in the dollar performance will favour the counter pair (CHF) matched with the US dollar. In this case, we can expect a downward trend for USDCHF.
The NFP report summarises economic progress made in the previous month regarding job creation. An improvement in job creation is always bullish for the US dollar. On the contrary, a high increase in the unemployment rate will mean a downward trend for the US dollar.
Whatever the outcome of this week’s Friday, it is essential to note that this report will likely induce substantial volatility for USDCHF this week as well.
