The Swiss Franc (CHF) holds onto Monday’s losses around 0.8088 against the US Dollar (USD) during the Asian trading session on Tuesday. The Swiss Franc pair faces selling pressure due to continued outperformance by the US Dollar amid firm expectations that the Federal Reserve (Fed) will hike interest rates this year.
At press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks higher at around 101.05, the highest level seen in over a year.
According to the CME FedWatch tool, the odds of the Fed hiking interest rates this year are almost 87%.
Hawkish Fed bets have been intensified as the Federal Open Market Committee (FOMC) Economic Projections report, released last week, showed that nine out of 19 policymakers have projected an interest rate hike this year. It appears a sharp turnaround as none of the officials favored a hike this year in March’s Economic Projections report.
For more cues on the United States (US) interest rate outlook, investors await the US Personal Consumption Expenditure Price Index (PCE) data for May, which will be released on Thursday.
In Tuesday’s session, investors will focus on the preliminary US S&P Global PMI data for June. The Services PMI is expected to arrive higher at 51.0 from 50.7 in May.
On the Swiss Franc front, investors await the ZEW Survey – Expectations data for June, which will be released on Wednesday.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
