Swiss Franc gains as US-Iran peace deal dents safe-haven demand for the US Dollar
- The Swiss Franc gains as US-Iran peace deal reduces safe-haven demand for the US Dollar.
- Falling Oil prices prompt traders to reassess the Federal Reserve's policy outlook.
- The Fed and SNB monetary policy decisions later this week are in focus, with both central banks expected to leave interest rates unchanged.
The Swiss Franc (CHF) strengthens against the US Dollar (USD) on Monday as the Greenback's safe-haven demand fades after the United States and Iran reached a peace agreement aimed at ending the war in the Middle East. At the time of writing, USD/CHF trades around 0.7923, down 0.60% on the day.
Market sentiment has improved as the four-month conflict appears to be nearing an end, with a formal signing ceremony expected on Friday. Under the 60-day memorandum of understanding (MoU), the United States will lift its blockade of Iranian ports, while Iran will reopen the Strait of Hormuz to commercial shipping.
Talks on Iran's nuclear program, sanctions relief and the release of frozen Iranian assets will continue during this period.
Following the latest developments, the US Dollar and Oil prices opened the week with a bearish gap. The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trades around 99.46, hovering near one-week lows.
Meanwhile, traders are reassessing the Federal Reserve's (Fed) monetary policy outlook as the pullback in Oil prices eases concerns about energy-driven inflation. The decline in crude prices has reduced expectations that the US central bank may need to raise interest rates later this year.
Market attention now turns to the Fed's monetary policy announcement on Wednesday, where policymakers are widely expected to keep interest rates unchanged. However, US inflation has accelerated sharply since the start of the war, rising to 4.2% in May, more than double the central bank's 2% target.
As such, the Fed could signal that interest rates will remain elevated for an extended period as officials remain committed to bringing inflation back to target.
Meanwhile, the inflationary impact of higher Oil prices has been largely limited in Switzerland. Inflation remains near the lower end of the Swiss National Bank's (SNB) 0%-2% target range, reinforcing expectations that the central bank will maintain its current policy settings.
The SNB is widely expected to keep interest rates unchanged at 0% at its monetary policy decision on Thursday. A Reuters poll released on Monday found that all 28 economists surveyed expect the SNB to leave interest rates unchanged this year. Only four respondents forecast one or two quarter-point rate hikes in 2027.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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