The USD/CHF pair has fallen over 5%, nearing 0.7985, mainly due to the weakness of the US Dollar. Tensions between the US and EU over Greenland’s sovereignty have negatively impacted the US Dollar, causing it to perform poorly. The US Dollar Index (DXY) is down by 0.25%, currently at around 99.15. President Donald Trump has threatened a 10% tariff on imports from several EU countries, adding to the tensions as EU leaders issue warnings about the potential impact on international relations.

Swiss Franc’s Gain

The Swiss Franc has strengthened because it is viewed as a safe haven amid the US-EU conflict, leading to increased demand. This week, attention will also be on speeches from global central bankers at the World Economic Forum in Davos, especially from Swiss National Bank Chairman Martin Schlegel. The US Dollar, which is a major global currency, is affected by decisions made by the Federal Reserve, especially regarding interest rates. When the Fed conducts quantitative easing (buying bonds to inject cash into the economy), it often weakens the US Dollar. In contrast, quantitative tightening (stopping those bond purchases) usually supports the Dollar. Given the steep decline in USD/CHF, traders should expect increased market volatility. The implied volatility of one-month USD/CHF options has surged to over 11%, a level not seen since the banking stress in the US in early 2025. This indicates that traders are anticipating significant price movements in the coming weeks. Derivative traders seem to be betting on further declines or ongoing volatility. Open interest in put options with strike prices between 0.7800 and 0.7900 has soared by nearly 40% in the last two trading sessions, suggesting a strong belief that the pair may drop further before stabilizing.

Upcoming Economic Events

A key event this week is SNB Chairman Schlegel’s speech at Davos, which will be closely monitored. The SNB has a history of significant actions to weaken the franc, most notably in 2015, so any dovish comments could trigger a sharp short squeeze. Traders might consider buying short-term call options to protect against unexpected remarks. This currency pressure is particularly challenging for the Swiss economy, as the latest manufacturing PMI from early January fell to 49.1, indicating a contraction. A consistently strong franc will worsen the situation for Switzerland’s vital export sector. This economic weakness may prompt the SNB to act sooner rather than later. In the US, market movements are not being driven by Federal Reserve policy. The latest inflation report showed that Core PCE is stable at 2.4%. This suggests that the Dollar’s weakness stems more from geopolitical issues rather than expectations of changing interest rates. Traders should focus on diplomatic developments as the main influence on the dollar’s value. With the February 1st tariff deadline approaching, uncertainty remains high. Using options strategies like straddles or strangles could be wise, as they benefit from significant price movements in either direction. This strategy allows traders to take advantage of volatility resulting from either a breakthrough in diplomacy or an escalation of the trade dispute. Create your live VT Markets account and start trading now.

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