Major central banks were in the spotlight this week, as the Federal Reserve and the European Central Bank raised rates by 50 basis points at their final meeting of the year. These moves overshadowed a 50 bp rate increase by Swiss National Bank, where rate moves are unusual – this week’s rate increase brought the benchmark rate to 1.0%, which was only the third hike this year.
The driver behind the rate hike was the all-familiar battle to curb inflation. Switzerland’s inflation rate of 3% pales in comparison to the eurozone (10.0%) or the US (7.1%) but is above the SNB’s target of 0-2%. The SNB has been aggressive, raising rates by 50 bp in June and an oversize 75-bp hike in September. After years of negative rates, the bank has dramatically changed policy, responding to what it called a “challenging situation” in a press release after the meeting.
The SNB also reminded the markets that it was “willing to be active in the foreign exchange market as necessary.” The bank has not hesitated in the past to intervene to prevent the Swiss franc from climbing too high and damaging the export sector. USD/CHF has declined over 7% since November 1st, and the SNB will be watching to see if the Swiss franc’s appreciation continues.
At this week's meeting, the markets are still digesting the Fed’s hawkish stance. Anyone listening to Jerome Powell and FOMC members would see that the Fed reiterated that it would continue to raise rates and that inflation remained too high. The markets, however, have been marching to their beat, expecting that a series of soft inflation reports might change the Fed’s tune.
There was talk of the Fed winding up its current rate cycle in February, but the rate statement dampened such hopes, stating that the Fed expected 'ongoing increases' in interest rates. Powell dismissed the recent drop in inflation, saying more evidence was required to sustain the downward trend. It seems a given after this hawkish meeting that the terminal rate is likely to rise above 5%, with some forecasts projecting that rates will go as high as 5.6%.
USD/CHF Technical
- USD/CHF is testing resistance at 0.9285. The next resistance line is at 0.9372
- There is support at 0.9228 and 0.9144
