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• The Swiss franc has strengthened significantly against the US dollar and the euro.
• Economists expect the Swiss National Bank to cut rates 1 more time this year.
• The US will publish the latest inflation report on Wednesday.

The USD/CHF exchange rate has crawled back in the past few days as focus shifted to the upcoming actions by the Federal Reserve, Swiss National Bank (SNB), and macroeconomic data. After crashing to 0.8435 last week, the pair has rebounded to 0.8670.
 

SNB interest rate cut

The Swiss National Bank caught analysts by surprise when it delivered its first interest rate cut a few months ago. It followed it up with another 25 basis points reduction in its most recent meeting in a bid to help the economic recovery. 

Analysts now expect the central bank to deliver another one cut later this year, bringing its interest rates to 1%. Some economists who participated in a Bloomberg survey noted that the bank would follow that cut with another one later this year.

The most dovish analysts warn that the strength of the Swiss franc could hurt the economy by making its goods more expensive to European clients. Indeed, the EUR/CHF exchange rate has plunged to its lowest point in a decade. 

Just last week, the biggest trade association in Switzerland warned the SNB to act quickly to reduce the franc’s strength. 

The SNB has long believed that the Swiss franc is highly overvalued against key currencies like the euro, sterling, and the US dollar. Indeed, the currency has risen by over 13% against the US dollar since October 2022. It has also rallied by over 15% against the euro and the sterling in the same period. 

The Swiss franc has also rallied because of its role as a safe haven. With tensions between the US and China escalating, many investors believe that the Swiss franc is a better currency to own. 

At the same time, there are concerns about the role of the US dollar as a safe haven now that the US public debt has surged to over $35 trillion while more countries are reducing their dollar holdings. 
 

US inflation data ahead

The next important catalyst for the USD/CHF exchange rate will be a series of economic data from the United States.

The statistics agency will publish the latest producer price index (PPI) report on Tuesday. Economists polled by Reuters expect the report to show that the headline PPI and core PPI numbers remained at 0.2% in July. 

The most important report will come out on Wednesday when the US publishes the July Consumer Price Index (CPI) report. Economists polled by Reuters expect the data to reveal that the headline CPI rose from -0.1% in June to 0.2% in July while remaining at 3.0% on a YoY basis. 

The core CPI, which excludes the volatile food and energy products, is expected to have moved from 0.1% to 0.2% while falling from 3.3% to 3.2%. 

These are important numbers because of their impact on the Federal Reserve, which has a dual mandate of ensuring stable inflation and low unemployment rate. 

If the numbers show that inflation dropped again in July, they will raise the probability of the Fed cutting interest rates in September. Still, the Fed is also expected to slash rates even if inflation rises slightly.

As part of the dual mandate, the Fed is also paying close attention to the labor market, which has shown signs of easing. While the economy is adding over 100k jobs a month, the unemployment rate has risen to 4.3% in July. 
 

US retail sales ahead

The US will also publish more economic numbers on Thursday. The most important of these will be the July retail sales numbers, which will provide more color of the state of the economy and the American consumer. 

Economists expect the numbers to show that the country’s retail sales dropped from 0.4% in June to 0.1% in July. Overall, the retail sales are expected to move from 0.0% in June to 0.4%. 

The other important data to watch this week will be the upcoming New York Empire State manufacturing index, import and export price index, industrial and manufacturing production, and business inventories. 

While these numbers are important, the Federal Reserve is expected to slash interest rates in its September meeting.
 

USD/CHF technical analysis

(Click on image to enlarge)

The daily chart shows that the USD to CHF exchange rate peaked at 0.9222 in May and has been in a strong bearish trend since then. It then formed a death cross pattern on July 30th as the 50-day and 200-day Exponential Moving Averages (EMA) crossed each other. 

The pair then tumbled to a low of 0.8432 on Monday last week as the unwinding of the Japanese yen carry trade intensified. It then rose to 0.8673, a performance that mirrored the performance of the USD/JPY pair.

Therefore, the pair will likely resume the downtrend as sellers target the key support level at 0.8500. The alternative scenario is where the USD/CHF pair rises and retests the key resistance point at 0.8830, its lowest point in June.

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