Swiss Franc on the ropes ahead of SNB meeting

• Swiss Franc is depreciating ahead of the key Swiss National Bank policy meeting on Thursday. 
• Lower inflation and growth point to the risk of a dovish policy tweak at the meeting.  
• USD/CHF is piercing above the top of a box range and threatening to break out substantially higher. 

The Swiss Franc (CHF) is trending lower on Wednesday in its most heavily traded pairs ahead of the week’s key event for the currency, the Swiss National Bank (SNB) policy meeting on Thursday. 

The decline may be due to traders seeing a heightened risk the SNB will change its messaging or even reduce interest rates at the meeting due to substantial declines in both inflation and growth over the last year.  

Swiss Franc at risk as growth and inflation decline

Inflation has fallen markedly in Switzerland in 2023.

“Inflation decreased significantly, from 3.2% in the first quarter to 1.6% in the fourth. The average for the year decreased from 2.8% in 2022 to 2.1% in the year under review,” said the SNB in its Annual Report for 2023. 

The latest inflation data for 2024 shows a further fall in inflation, with the Consumer Price Index (CPI) rising by 1.2% YoY in February from the 1.3% registered in the previous month, according to the Federal Statistical Office.  

Overall this is lower than what the SNB expected back at its December meeting, when it said  inflation, which was then at 1.4%, was likely to “increase somewhat in the coming months due to higher electricity prices and rents, as well as the rise in VAT.”

The SNB estimates inflation will average 1.9% in 2024. However, the rate of inflation is currently considerably below that figure at 1.2%. That said, on a monthly basis it accelerated, with CPI up 0.6% in February from 0.2% previously. 

Inflation is also well below the SNB’s first-quarter forecast of 1.8%. 

"Consumer price inflation is running 0.6 ppts below the bank's 1.8% first-quarter forecast, while core inflation of 1.1% is the lowest since January 2022," Reuters reports. 

Swiss GDP in 2023 almost cut in half

Economic growth in Switzerland has also been considerably slower in 2023 than in 2022. 

“Swiss economic growth was modest in 2023. According to the initial estimate by the State Secretariat for Economic Affairs (SECO), growth in GDP adjusted for seasonal effects and sporting events was 1.3%. This was significantly slower than the 2.5% recorded the year before,” says the bank in its 2023 Annual Report. 

The decline in both inflation and growth raises the question of whether the SNB will need to ease policy and trim its 1.75% policy rate. The probabilities of the SNB cutting interest rates on Thursday stand at 29%, according to a Reuters’ report published on Monday. If it were to cut rates the Swiss Franc would weaken, as lower interest rates attract less foreign capital inflows.

Technical Analysis: Swiss Franc to USD exchange rate penetrates top of range  

The USD/CHF, which measures the buying power of a single US Dollar in Swiss Francs, is penetrating the top of a range it has been oscillating within, between roughly 0.8900 and 0.8740, since the middle of February.

US Dollar versus Swiss Franc: 4-hour chart

A decisive break above the range highs at 0.8900 is underway but yet to be confirmed. A strong close on Wednesday would be required to indicate a decisive breakout. 

Should that be the case, the initial target for the breakout is at 0.8992, the 0.618 Fibonacci (Fib) ratio of the height of the range extrapolated higher, followed by 0.9052, the full height extrapolated higher. 

The pair is overall in a short-term uptrend, supporting more upside. However, resistance from a long-term trendline and the 50-week Simple Moving Average (SMA) present considerable obstacles. 

Alternatively, a decisive break below the range low at 0.8729 could indicate a short-term trend reversal and the start of a deeper slide. 

The first target for such a move would be the 0.618 Fib. extrapolation of the height of the range at 0.8632, followed by the full extrapolation at 0.8577, which is also close to the 0.8551 January 31 lows, another key support level to the downside.