Swiss Franc declines as US Dollar rises on Fed rate hike bets

USD/CHF continues its winning streak for the fifth successive trading day, reaching its fresh 16-month high of 0.8327 during Asian hours on Tuesday. The pair gains support as the US Dollar (USD) rises amid ongoing uncertainty surrounding US-Iran negotiations, keeping oil prices elevated. This persistent pressure on energy costs has heightened expectations that the Federal Reserve (Fed) will need to tighten monetary policy further to combat inflation.

Rising inflation concerns and expectations of additional rate increases pushed Treasury yields to fresh multi-year highs, with both the 10- and 30-year yields climbing above 5%. Following the central bank’s initial rate hike in three years earlier this month, the CME FedWatch Tool shows money markets are currently pricing in roughly a 70% probability of another Federal Reserve rate increase in October.

Traders await the upcoming US economic indicators for signals regarding future monetary policy. Key releases later this week include Wednesday’s US Personal Consumption Expenditures (PCE) inflation report and Friday’s Nonfarm Payrolls report.

The USD/CHF pair gained ground as the Swiss Franc (CHF) weakened following the Swiss National Bank’s (SNB) latest monetary policy assessment. Diverging from the tightening path of other major central banks, the SNB held its key interest rate unchanged at 0% during its September meeting.

Policymakers noted that lingering Middle East tensions continue to keep global oil prices elevated, maintaining high uncertainty in the global outlook. The SNB also reiterated its willingness to intervene in the foreign-exchange market as needed, though markets remain divided on whether future interventions will aim to suppress or support the Franc.

Despite these headwinds, the Swiss Franc could find a floor as a low-yielding funding currency for carry trades. Expectations of further interest rate hikes by the Federal Reserve are driving a widening yield differential between the US and Switzerland, which may continue to influence capital flows between the two currencies.

Franc positioning steady as SNB outlook underpins rate expectations

Analysts at Rabobank observe that speculative positioning in the Swiss Franc has shown little sign of adjustment in recent weeks, with "CHF net short positioning is largely unchanged." This stability in market positioning comes despite growing expectations for a more active SNB policy path, leaving investors cautiously positioned against the Franc even as the rate outlook turns more supportive.