The USD/CHF pair continues to drop, currently at 0.7930, which is a 0.27% decrease for the day. This decline over the past four days is driven by the Swiss Franc gaining strength, as expectations for more monetary easing from the Swiss National Bank (SNB) are fading. Minutes from the recent SNB meeting reveal that deflation risks are no longer a major concern, making negative interest rates unlikely. Meanwhile, the US Dollar is weakening, with a anticipated Federal Reserve rate cut of 25 basis points, bringing the target down to 3.75%-4.00%.

Rate Cut Expectations And Political Impact

The CME FedWatch tool shows a 97% chance of a rate cut in October and a 95% chance of another cut in December. Political uncertainty in the US, along with a government shutdown, is affecting the currency and raising discussions within the Federal Reserve about further easing. Even with these issues, the US Dollar might see temporary support from improved risk sentiment. Optimism is building around US-China trade talks, as President Trump and President Xi Jinping prepare to discuss a framework agreement on tariffs, which could stabilize the Dollar. Currently, the US Dollar is doing better against the British Pound, but it is weaker against several other major currencies, reflecting overall market trends. The main factor driving these changes is the growing difference in policies between the US Federal Reserve and the Swiss National Bank. The Fed is clearly set on cutting rates, while the SNB has indicated it is finished easing for now, especially with Swiss inflation recently rising to 1.8% year-over-year. This scenario favors the continued strength of the Swiss Franc against the US Dollar, making USD/CHF put options or outright futures short positions appealing in the upcoming weeks.

Implications Of Federal Reserve Policy And Market Dynamics

While it is widely expected that the Fed will cut rates by 25 basis points tomorrow, the focus will be on their forward guidance. Given the ongoing government shutdown and the October 2025 ISM Manufacturing PMI dropping to 48.5, we expect a very dovish tone, which could speed up the dollar’s decline. Rising currency volatility is indicated by the CVIX index, which has increased from 6.5 to 7.8 this month, hinting that option premiums are going up. It is wise to set positions before the Fed’s announcement. The interest rate difference that has supported the dollar for years is shrinking quickly. Traders are adjusting forward currency swaps to reflect market expectations of another Fed cut in December, which would lower the target rate to 3.50%-3.75%. This ongoing decrease in the dollar’s yield advantage will likely maintain pressure on the currency as the year ends. However, we should be cautious about the upcoming meeting between the US and Chinese presidents. A surprisingly positive outcome on trade could lead to a brief risk-on rally, providing a temporary boost to the dollar, similar to the responses seen during the trade talks in 2019. This could pose a risk to short USD positions, which might be hedged with inexpensive, short-dated call options on USD/CHF. Create your live VT Markets account and start trading now.

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