Swiss Franc weakens as SNB resists currency strength, US CPI awaited

USD/CHF trades around 0.7815 on Tuesday at the time of writing, up 0.46% on the day, supported by renewed demand for the US Dollar (USD) amid fresh geopolitical tensions in the Middle East.

Market sentiment deteriorates after comments from United States (US) President Donald Trump stating that the US-Iran ceasefire is on “life support.” According to CNN, several members of his administration are now reportedly considering a resumption of major military operations more seriously. This backdrop revives safe-haven flows and supports the Greenback.

The US Dollar Index (DXY), which measures the US Dollar’s performance against a basket of six major currencies, rises toward 98.30, also supported by increasingly hawkish expectations regarding the Federal Reserve’s (Fed) monetary policy.

Investors are now awaiting the release of the US Consumer Price Index (CPI) for April. Consensus expects annual inflation to accelerate to 3.7% from 3.3% previously, while core inflation is seen rising to 2.7% from 2.6% in March. Stronger-than-expected figures could reinforce expectations that the Fed will keep interest rates higher for longer, further supporting the US Dollar.

On the Swiss side, recent data showed inflation rose for a second consecutive month, although it remains well below the Swiss National Bank’s (SNB) 2% target. Annual inflation reached 0.6% in April after 0.3% in March, while core inflation slowed to 0.3%.

MUFG economists note that the Swiss Franc (CHF) has underperformed since the beginning of the Middle East war, as the SNB has clearly signaled its willingness to limit currency appreciation. SNB Governor Martin Schlegel also downplayed the recent increase in inflation, stating that medium-term price pressures had “hardly changed.”

However, MUFG believes that a prolonged closure of the Strait of Hormuz and a sustained rise in energy prices could push the Swiss National Bank toward a more hawkish stance in the coming months. Money markets are already starting to price in a higher chance of an SNB rate hike by the end of the year.