The US Dollar climbed just above 0.8050 during the early European trading hours, continuing its upward trend for four days. This rise is supported by the weakness of the Swiss Franc, which was affected by Swiss CPI data showing stronger deflation in October. In October, Swiss consumer inflation dropped by 0.3%, following a 0.2% decrease in September. This was worse than the expected slight improvement to -0.1%. The annual inflation rate fell to 0.1%, down from 0.2% the month before, even though forecasts expected it to rise to 0.3%.

Monetary Policy Implications

These figures pressure the Swiss National Bank (SNB) to possibly lower rates even more below zero. However, the SNB President has hesitated to make this move despite increasing deflation. The Federal Reserve recently cut interest rates, but its chairman mentioned that a December cut is uncertain. This situation highlights a difference in monetary policies, which supports the strength of the US Dollar. We are closely watching upcoming US private data, with hopes for better manufacturing numbers. The S&P Global Manufacturing PMI is expected to rise to 52.2, while the ISM PMI may slightly decline to 49.2, down from 49.1. The recent Swiss inflation results signal clear deflation, putting the SNB in a difficult position and making a future rate cut more likely. As a result, this strengthens the case for a weaker Swiss Franc compared to the US Dollar.

Trading Strategies and Market Sentiment

Recalling past actions, the SNB aggressively used negative rates during the deflation from 2015-2021 to weaken the Franc. Current overnight index swaps indicate there is now over a 60% chance of a rate cut by year-end, a significant increase from just last week. This sentiment suggests traders expect the SNB to act quickly. Meanwhile, the US Dollar remains strong due to the Federal Reserve’s position. Although the Fed cut rates last week, the CME FedWatch Tool indicates less than a 25% chance of another cut in December. This policy gap with the dovish SNB is a key factor driving the USD/CHF pair higher. For derivative traders, this points to bullish strategies on the USD/CHF pair. Buying call options with strike prices above 0.8100 for the upcoming weeks could be a way to profit from the anticipated rise with limited risk. Long futures contracts are another way to express this positive outlook. In the short term, we’re monitoring today’s US ISM Manufacturing PMI for any signs of economic weakness that might affect this view. Additionally, comments from SNB officials regarding the deflation numbers will be crucial. Upcoming US inflation and job data will also be important to confirm the Fed’s less-dovish approach. Create your live VT Markets account and start trading now.

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