- The Swiss Franc is displaying signs of weakness ahead of the crucial Swiss National Bank policy meeting scheduled for Thursday.
- The prospects of a dovish policy adjustment at the meeting are heightened due to lower inflation and growth indicators.
- Concurrently, the USD/CHF pair is breaching the upper boundary of a defined range, signaling a potential significant upward breakout.
The Swiss Franc (CHF) is experiencing a downward trend on Wednesday across its major pairs, leading up to the significant event of the week for the currency: the Swiss National Bank (SNB) policy meeting on Thursday.
This decline could be attributed to traders perceiving an increased likelihood that the SNB will alter its messaging or potentially lower interest rates at the meeting. This sentiment stems from significant declines observed in both inflation and growth over the past year.
Swiss Franc at risk as growth and inflation decline
Inflation in Switzerland experienced a significant decline in 2023, according to the Swiss National Bank’s (SNB) Annual Report for that year. The rate dropped notably from 3.2% in the first quarter to 1.6% in the fourth quarter, leading to an average of 2.1% for the year, down from 2.8% in 2022.
Recent inflation data for 2024 indicates a further decrease, with the Consumer Price Index (CPI) rising by only 1.2% year-on-year in February, compared to 1.3% in the previous month, as reported by the Federal Statistical Office.
These figures are below the SNB’s expectations stated at its December meeting, where it anticipated a rise in inflation, then at 1.4%, due to factors such as increased electricity prices, rents, and the rise in VAT.
The SNB’s projection for inflation to average 1.9% in 2024 appears to be significantly higher than the current rate of 1.2%. However, there was a slight acceleration on a monthly basis, with CPI increasing by 0.6% in February compared to 0.2% previously.
Additionally, inflation falls well below the SNB’s first-quarter forecast of 1.8%. According to Reuters, consumer price inflation is 0.6 percentage points below the bank’s forecast, while core inflation stands at 1.1%, marking its lowest level since January 2022.
Swiss GDP in 2023 almost cut in half
In 2023, economic growth in Switzerland slowed considerably compared to the previous year, as reported by the State Secretariat for Economic Affairs (SECO) in its 2023 Annual Report. The initial estimate indicated that GDP growth, adjusted for seasonal effects and sporting events, stood at 1.3%, marking a significant decline from the 2.5% growth recorded in 2022.
This deceleration in both inflation and economic growth raises speculation regarding whether the Swiss National Bank (SNB) will need to implement policy easing measures, potentially including a reduction of its 1.75% policy rate. According to a Reuters’ report published on Monday, the probability of the SNB cutting interest rates on Thursday stands at 29%. Should such a decision be made, it could lead to a weakening of the Swiss Franc, as lower interest rates tend to deter foreign capital inflows.
Technical Analysis: Swiss Franc to USD exchange rate penetrates top of range
The USD/CHF, reflecting the purchasing power of one US Dollar in Swiss Francs, is breaking through the upper boundary of a range it has been fluctuating within, approximately between 0.8900 and 0.8740, since mid-February.
A significant push above the range highs at 0.8900 appears to be in progress but confirmation is pending. A robust close on Wednesday would signal a definite breakout.
Should this materialize, the initial target for the breakout lies at 0.8992, corresponding to the 0.618 Fibonacci (Fib) ratio derived from the range height projected upward. Subsequently, the target extends to 0.9052, representing the full height projected higher.
The pair is currently within a short-term uptrend, suggesting further upside potential. Nonetheless, significant barriers exist in the form of resistance from a long-term trendline and the 50-week Simple Moving Average (SMA).
Conversely, a clear breach below the range low at 0.8729 could signal a reversal of the short-term trend and initiate a deeper descent.
In such a scenario, the initial target for the downward move would be at 0.8632, calculated as the 0.618 Fib extrapolation of the range height. Further downside potential extends to 0.8577, which aligns closely with the January 31 lows at 0.8551, representing another critical support level.
