USD/CHF holds steady near 0.8800, traders await Fed, SNB rate decisions

USD/CHF flat lines around 0.8810 in Tuesday’s early European session.
Geopolitical risks in the Middle East could boost the safe haven flows, benefiting the Swiss Franc.
The Fed and SNB interest rate decisions will be the highlights later this week.

The USD/CHF pair trades on a flat note near 0.8810 during the early European session on Tuesday. The potential upside of the pair might be limited due to the heightened economic uncertainty and rising geopolitical tensions in the Middle East.

The US Dollar Index (DXY), an index of the value of the USD relative to a basket of foreign currencies, currently edges higher to 103.55, adding 0.13% on the day. The Greenback got support from US Retail Sales on Monday that showed a modest rebound in February after a revised 1.2% decline in January.

Markets expect the US Federal Reserve (Fed) to hold interest rates at its March meeting on Wednesday, with the next cut in June. The US central bank will give its new economic projections after the rate decision, which might offer some hints about how officials view the likely impact of US President Donald Trump's policies and US economic outlook.

On the other hand, the escalating geopolitical tensions in the Middle East could boost the safe haven currency like the Swiss Franc (CHF) and create a headwind for USD/CHF. On Tuesday, Israeli Prime Minister Benjamin Netanyahu said in a statement, "From now on, Israel will act against Hamas with increasing military force.” The order came after the militant group refused to release our hostages and rejected all offers it received from the US presidential envoy and the mediators.

The Swiss National Bank (SNB) is anticipated to cut its main policy rate by a quarter percentage point on Thursday to 0.25% and hold it there until at least 2026, according to most economists polled by Reuters. "Previously there had appeared to be a reasonable chance of the SNB cutting to zero or below, but those chances now look slim," said Adrian Prettejohn, Europe economist at Capital Economics.

Indian Rupee FAQs

What are the key factors driving the Indian Rupee?

The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.

How do the decisions of the Reserve Bank of India impact the Indian Rupee?

The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.

What macroeconomic factors influence the value of the Indian Rupee?

Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.

How does inflation impact the Indian Rupee?

Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.