Switzerland is currently facing mild deflation. In December, the Producer Price Index dropped by 1.8% compared to last year, while the Consumer Price Index showed a small increase of just 0.1% in January. This situation has led to speculation about possible interest rate cuts by the Swiss National Bank (SNB). Weak manufacturing activity is a concern, as indicated by a Purchasing Managers’ Index of 45.8 in December. Market expectations suggest that the SNB may lower interest rates below zero soon. The decline in the Producer Price Index points to deflation risks. The slight increase in the Consumer Price Index keeps inflation at very low levels. The SNB meets to discuss policy four times a year, with the next meeting scheduled for March 19.

Impact of Trade Tensions

Increased trade tensions between the EU and the US could harm the Swiss economy, which might lead policymakers to adopt a more cautious approach. Despite these risks, the Swiss franc remains strong due to safe-haven demand, with the EUR/CHF exchange rate steady 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 saw significant deflationary risks, with producer prices falling and general inflation just above zero. Manufacturing activity was also declining, which suggested the Swiss National Bank might consider a more cautious policy. As a result, the SNB cut its policy rate to -0.25% at its March 2025 meeting to combat economic slowdown and prevent deflation. This rate cut initially weakened the franc, raising the EUR/CHF exchange rate to about 0.93 in the second quarter. The move was a direct response to worries about the economy’s lack of growth.

Current Economic Outlook

Today, the situation has improved slightly, with December 2025 inflation data showing a rise to 0.5%, moving us away from immediate deflation concerns. However, the latest manufacturing PMI remains low at 48.2, which indicates ongoing economic weaknesses. As a result, the SNB is likely to keep rates negative for now, stabilizing short-term yields. For traders in derivatives, this suggests a period of low implied volatility in the Swiss franc. With the SNB expected to keep rates down and safe-haven demand supporting the currency, the EUR/CHF pair could stay between 0.9250 and 0.9450. Strategies that benefit from stable prices, like selling straddles, might be advantageous in the upcoming weeks. We should be wary of unexpected global events, which can drive significant safe-haven flows into the franc. A sudden rise in geopolitical risks could push the EUR/CHF back below 0.92, increasing volatility. Therefore, holding some inexpensive, out-of-the-money puts on EUR/CHF could provide a useful hedge against such risks. Create your live VT Markets account and start trading now.

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