Switzerland is facing mild deflation, with the Producer Price Index (PPI) dropping by 1.8% year-over-year in December. The Consumer Price Index (CPI) for January is just slightly positive at 0.1%. These trends are raising concerns about possible interest rate cuts from the Swiss National Bank (SNB). Weak manufacturing activity, reflected in a Purchasing Managers’ Index (PMI) of 45.8 in December, is adding to economic worries. Market expectations suggest the SNB might lower rates below zero soon. The PPI’s decline indicates deflation risks, while the CPI’s slight rise shows minimal inflation. The SNB holds four policy meetings each year, with the next scheduled for March 19.

Impact of Trade Tensions

Increased trade tensions between the EU and the US could hurt the Swiss economy, potentially leading to a more cautious approach from policymakers. Despite these challenges, safe-haven investments are expected to keep the Swiss franc stable, with the EUR/CHF exchange rate around 0.92. Rabobank maintains a three-month forecast for EUR/CHF at 0.92, indicating ongoing support for the currency. Looking back to early 2025, we noted clear deflationary risks, with producer prices declining and inflation rates barely above zero. Manufacturing activity was also contracting at that time. This situation pushed the Swiss National Bank to adopt a more dovish policy. Consequently, the SNB cut its policy rate to -0.25% at its March 2025 meeting to combat the economic slowdown and prevent a deflation spiral. This initial cut weakened the franc, pushing the EUR/CHF rate up towards 0.93 during the second quarter of that year. The decision was a direct response to ongoing economic weakness.

Current Economic Outlook

Today, the situation has stabilized, with December 2025 inflation data showing a rise to 0.5%, moving away from immediate deflation risks. However, the latest manufacturing PMI remains low at 48.2, indicating persistent economic weakness. This suggests that the SNB will likely keep rates negative for now. For derivatives traders, this hints at a period of low implied volatility in the Swiss franc. With the SNB unlikely to raise rates soon, the EUR/CHF pair could stay relatively stable between approximately 0.9250 and 0.9450. Strategies benefiting from time decay and stable prices, like selling straddles, may be advantageous in the coming weeks. We must stay alert for unexpected global events, which historically prompt significant safe-haven flows into the franc. An increase in geopolitical risks could quickly push the EUR/CHF back below 0.92, causing volatility to spike. Therefore, holding some inexpensive, out-of-the-money put options on EUR/CHF could be a wise hedge against such potential risks. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now