A hawkish stance from the FOMC, coupled with the potential effects of Trump’s policies, continues to bolster a strong USD. Meanwhile, in a low-inflation environment and with expectations of further rate cuts from the SNB, the CHF is likely to remain the top funding currency in 2025—assuming no major geopolitical or political disruptions occur.

USD: New year, old market driver

The narrative of strong US dollar remains supported by a combination of favorable seasonality, resilient economic data, and policy dynamics. Historically, the dollar exhibits strength in January and February, a trend likely to persist unless key narratives shift. Recent data, such as the ISM Manufacturing PMI, exceeded expectations, signaling improving economic momentum. Notably, new orders and production returned to expansionary territory, although employment in manufacturing weakened, highlighting uneven sectoral performance.

Monetary policy continues to favor dollar strength, with the Federal Reserve adopting a cautious stance on rate cuts. While markets anticipate modest easing in 2025, the Fed’s projections indicate a slower pace of reductions, emphasizing concerns over potential inflation risks and a robust labor market. In contrast, other major central banks are expected to maintain dovish policies, widening the policy divergence and further bolstering the dollar.

Fiscal policies and geopolitical developments also play a role. Plans for heightened tariffs and tightened border controls may drive inflationary pressures, reinforcing the Fed’s restrictive stance. Meanwhile, manufacturing sectors face uncertainties around trade, likely constraining activity in the short term. Despite this, steady employment levels and strong asset values suggest resilient consumer spending, a key pillar of economic stability.

Looking ahead, market will focusing on the NFP report, and several Fed speeches. As for the NFP, unless there is a significant downside surprise, the data is expected to reinforce the narrative of a resilient labor market, with risks to the labor market outlook appearing balanced. Even in the event of a mild downside surprise, it is unlikely to shift the Fed’s position, which favors holding rates steady at the January meeting as the larger uncertainty on the horizon of the return of heightened tariffs, tightened border controls, and tax cuts under Trump on January 20. These factors could pose challenges for the Fed in pursuing rate reductions in 2025. Currently, market pricing indicates an 90% probability that the Fed will maintain rates at the January meeting, reflecting the prevailing cautious sentiment amid looming policy and economic uncertainties.

CHF: Best funding currency in 2025

The outlook for the CHF remains pressured following the SNB unexpected 50 basis points rate cut in December, lowering the policy rate to 0.50%. This marked a shift to a more accommodative stance, reinforced by downgraded inflation forecasts. Inflation for 2024 is now projected at 1.1% (down from 1.2%) and expected to drop sharply to 0.3% in 2025 (previously 0.6%), reflecting weaker price pressures, particularly in oil products and food. While GDP growth projections remained steady at 1.0% for 2024, modest growth of 1-1.5% is anticipated for 2025. The SNB has adopted a gradual approach, signaling that further rate cuts will depend on data developments, moving away from its earlier dovish tone. Although the central bank has stopped explicitly mentioning “further rate cuts,” the door remains open for additional easing over the coming quarters.

November’s inflation data added to the bearish tone, with CPI increasing to 0.7% y/y, slightly below the consensus of 0.8% but higher than the prior 0.6%. The SNB cited this moderation in inflation as a driver for its rate cut, noting that lower oil and food prices were significant contributors. Despite trimming its near-term inflation forecasts, the medium-term outlook remains relatively stable, with inflation expected to average just 0.2% in Q2-2025 before recovering slightly toward the end of 2025 and early 2026. These subdued projections keep the possibility of additional policy easing alive, with Chairman Schlegel acknowledging that while a return to negative interest rates (NIRP) is unlikely, it remains an option if necessary.

The CHF’s weakness was evident following the December rate cut, with EUR/CHF climbing higher as markets began pricing in further SNB rate cuts into 2025. However, geopolitical risks and potential disruptions from U.S. economic policies could intermittently bolster the CHF’s safe-haven appeal, creating pockets of strength. ING anticipates that the ECB will outpace the SNB in rate cuts through 2025, which could drive EUR/CHF toward 0.90, as broader geopolitical uncertainties and Eurozone recession risks weigh on the currency pair.

Looking forward, CHF sentiment is likely to remain subdued, with inflationary pressures expected to stay weak and the SNB showing increased tolerance for inflation falling below its target range of 0-2%. Although the central bank has maintained its readiness to intervene in foreign exchange markets to curb excessive CHF strength, its reluctance to see a significant appreciation of the franc could be challenged by safe-haven flows. Overall, while the CHF is expected to face headwinds into 2025, periods of geopolitical uncertainty may provide temporary support, complicating the SNB’s objective of maintaining a competitive exchange rate.