USD/CHF drifts lower amid modest USD pullback, holds above 0.8600 mark

• USD/CHF erodes a part of the overnight strong gains to a nearly two-month top.
• A modest USD pullback turns out to be a key factor exerting downward pressure.
• Smaller Fed rate cut bets should limit the downfall for the USD and the major.

The USD/CHF pair struggles to capitalize on the previous day's strong move up to a nearly two-month high and attracts some intraday sellers during the first half of the European session on Tuesday. The downtick drags spot prices to the 0.8615 region, or a fresh daily low in the last hour and is sponsored by a modest US Dollar (USD) pullback.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, retreats from its highest level since August 8 as bullish traders opt to take some profits off the table following the recent strong rally since the beginning of this month. Any meaningful USD corrective decline, however, seems elusive in the wake of firming expectations for a less aggressive policy easing by the Federal Reserve (Fed).

In fact, the markets have now fully priced out the possibility of another jumbo rate cut and expect the US central bank to lower borrowing costs by 25 basis points (bps) at the November policy meeting. This keeps the yield on the benchmark 10-year US government bond above the 4% threshold, which should continue to act as a tailwind for the Greenback and help limit the depreciating move for the USD/CHF pair. 

Apart from this, a generally positive tone across the global equity markets might hold back traders from placing bullish bets around the safe-haven Swiss Franc (CHF) and offer support to the currency pair. Hence, it will be prudent to wait for strong follow-through selling before confirming that the strong move-up witnessed over the past two weeks or so has run out of steam and positioning for further losses. 

Next on tap is the release of the Empire State Manufacturing Index from the US, which, along with speeches by influential FOMC members, will drive USD demand later during the North American session. Apart from this, the broader risk sentiment might provide some impetus to the USD/CHF pair and allow traders to grab short-term opportunities.