Fed Expectations and Swiss Developments

The Federal Reserve is expected to cut rates again, with a 95% chance of a 25-basis-point cut in October and an 80% chance in December. Upcoming FOMC Minutes may provide additional insights into policymakers’ opinions. In Switzerland, rising unemployment and lower inflation have raised speculation about the Swiss National Bank (SNB) possibly reintroducing negative interest rates, putting pressure on the Swiss Franc (CHF). A heat map shows changes in currencies, highlighting differences between base and quote currencies like the Swiss Franc and US Dollar. The CHF is showing varying strengths against other currencies, reflecting market volatility. The US Dollar is strong against the Swiss Franc, pushing USD/CHF above the 0.8000 mark. This strength mainly comes from investors seeking safety amid the ongoing US government shutdown, now in its second week. However, we should be cautious as this demand for the dollar is likely short-lived. Looking at the past, during the 35-day shutdown in 2018-2019, the dollar initially strengthened before economic realities took hold. If the current situation continues, it will start to affect the US economy and the dollar. This circumstance will likely pressure the Federal Reserve to adopt a more cautious approach.

Possible Market Reactions

The market is pricing in a 95% probability of a Fed rate cut in October, according to the CME FedWatch tool. This high likelihood will likely limit any further strength in the dollar over the next few weeks. Therefore, options strategies should consider a potential cap on the dollar’s rise. Conversely, the Swiss Franc is facing challenges due to speculation that the SNB will further reduce interest rates, possibly back into negative territory. The recent rise in Swiss unemployment to 3.0% and a decrease in CPI by 0.2% are concerning signs for the SNB. Remember, the SNB maintained negative rates from 2015 until September 2022, showing that they are willing to use this tool to weaken the franc. Considering these opposing factors, traders should explore derivative strategies that could profit from a continued but limited rise in USD/CHF. A bullish call spread could be a good option, allowing for gains from upward movement while managing risk if the shutdown ends abruptly or the Fed’s position becomes clearer. This strategy balances the weakness of the Swiss Franc against the capped strength of the US Dollar. Create your live VT Markets account and start trading now.

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