The USD/CHF pair is hovering near its highest level in two months as the divergence between the Federal Reserve and the Swiss National Bank (SNB) widened. The pair is trading at 0.9195, which is slightly below last Friday’s high of 0.9238.
SNB and Fed divergence
The Fed and the SNB delivered their monetary policy update last week. The two banks left their overall monetary policy framework unchanged. The Fed left interest rates at a record low of between 0% and 0.25% while continuing its $120 billion monthly asset purchases. On its part, the SNB left interest rates unchanged at -0.75% and insisted that the Swiss franc was overvalued.
A divergence between the two happened because the Fed provided hints that it will start hiking interest rates in 2023, earlier than the previous estimate of 2024. As such, analysts expect that the bank will start tapering its $120 billion per month asset purchases soon. The SNB has not signaled when it will start tightening, considering that inflation in the country remains stubbornly low.
On Tuesday, the USD/CHF moved as Jerome Powell testified before Congress. In his statement, the Fed Chair sounded dovish as he pledged that the bank would do whatever it takes to help sustain the economic recovery. He also said that the US economy will keep recovering, with the unemployment rate expected to fall to 5.0% in the next few months. At the same time, he warned of the difficulties of predicting inflation but said that it is unlikely that the rate will reach 1970s levels.
Switzerland has also been recovering strongly from the coronavirus pandemic, helped by strong internal and external demand. The strong pace of vaccination has also helped to support this recovery. The State Secretariat for Economic Affairs (SECO) said that it expects that the Swiss economy will bounce back by 3.5% this year. It shrank at a lower rate than comparable countries in 2020 amid the pandemic.
Recent numbers from Switzerland have been relatively strong. Unemployment remains at 3%, which is better than the US 5.8%. Retail sales have risen while the manufacturing and services PMI numbers have risen substantially.
Looking ahead, the USD/CHF pair will mostly react to statements and hints from the Fed about winding down the quantitative easing program. It will also react to upcoming economic numbers from the US.
On Wednesday, investors will be focusing on the US flash manufacturing and services PMIs and new home sales numbers. The home numbers will come a day after the US released strong existing home sales numbers. The data showed that existing sales declined in May because of the ongoing shortage. This pushed the average home prices to a record high. The USD/CHF will also be affected by the latest US GDP and initial jobless claims numbers scheduled for Thursday.
USD/CHF technical analysis
The USD/CHF pair has been in a strong upward trend in the past few weeks. It has risen by more than 3% from its lowest level this month. The pair is also trading at the 50% Fibonacci retracement level. Further, it is being supported by the 25-day and 50-day exponential moving averages (EMA). It also forms a bullish flag pattern. Therefore, the pair will likely keep rising as the gap between the Fed and SNB rises. If this happens, the next level to watch will be the 61.8% retracement level at 0.9267.