The GBP remains fundamentally supported as the BoE shows no urgency to cut rates, benefits from lower exposure to potential tariffs linked to Trump, and remains focused on addressing domestic inflation. Meanwhile, the latest Swiss CPI data suggests a 71% probability that the SNB will cut rates by 50bp this month. However, political uncertainty in France and Germany poses risks that could challenge our bearish outlook on the CHF.

GBP: Remain supported

The GBP remains fundamentally supported, with a bullish long-term outlook driven by solid domestic and external factors. The latest inflation data, especially the sticky services inflation reinforces the BoE’s “gradual cut” narrative, indicating a likely hold in December. The robust UK labor market, characterized by strong wage growth, sustains moderate inflationary pressures, strengthening the case for a delayed easing cycle. Additionally, the recent fiscal stimulus, equivalent to 1% of GDP, is expected to bolster domestic demand, further postponing the need for monetary policy adjustments. The UK’s lower exposure to trade tariffs and reliance on the services sector provide resilience compared to the Eurozone, which enhances GBP’s relative attractiveness. Improved UK-EU relations add structural support for a stronger GBP in the longer term.

In addition, market expectations remain optimistic about GBP performance among G10 currencies, citing pro-cyclical factors and positive momentum from UK growth supported by the Autumn Budget. Elevated inflation compared to G10 peers supports the BoE’s cautious and gradual approach to rate cuts. Deputy Governor Clare Lombardelli emphasized a “wait and see” stance, highlighting concerns about persistently high services inflation. She indicated that further evidence of disinflation is needed before proceeding with easing. Markets currently anticipate minimal cuts, with only 3bps priced in for December.

Some analysts note that the BoE’s caution relative to the ECB encourages long GBP positions. While Deputy Governor Lombardelli acknowledged balanced risks, she remains wary of inflationary persistence, particularly as wage disinflation shows limited progress. With the ECB expected to cut rates at twice the pace of the BoE, this divergence supports GBP strength. Moreover, the UK’s trade structure, with services exports constituting a smaller share of GDP vulnerable to tariffs, positions GBP to withstand trade-related shocks better than the Eurozone. In the event of escalating trade tensions, the UK’s small trade surplus with the US reduces its exposure to potential US tariff measures, adding to GBP resilience despite global uncertainties. In summary, the GBP’s resilience is driven by domestic economic strength, fiscal support, and relative protection against global trade risks, presenting opportunities for GBP strength, particularly against weaker currencies in the near term.

CHF: Further cut from SNB, but careful on political & geopolitical event

The CHF faces sustained pressure from both domestic and external factors, with a bearish outlook driven by the Swiss National Bank's (SNB) dovish stance and geopolitical dynamics. Domestically, the SNB has adopted a flexible inflation-targeting strategy, utilizing policy rates and foreign exchange interventions to manage economic challenges. Chairman Schlegel has highlighted Switzerland's low inflation, the appreciating currency, and vulnerability to global economic slowdowns, reaffirming the SNB’s commitment to price stability. While the SNB remains uneasy wiath negative interest rates, Schlegel noted they are a viable tool if needed. Markets are currently pricing a 70% probability of a 25bp rate cut in December and a 30% chance of a 50bp reduction.

Externally, geopolitical factors like the Russia-Ukraine conflict have supported the CHF’s safe-haven appeal. However, this effect appears to be diminishing unless the conflict escalates further, as Switzerland's economic fundamentals and monetary policy now play a more significant role in shaping CHF sentiment. Schlegel’s comments on the challenges of CHF’s safe-haven status emphasize the SNB's concerns about unchecked currency appreciation, which could undermine export competitiveness and intensify deflationary pressures.

The released of Switzerland’s November CPI data saw the Y/Y rate print at 0.7% vs. exp. 0.8% (prev. 0.6%) and fall short of the SNB's Q4 average expectation of 1.0%. In response to the release, market pricing is now in favor of a 50bps cut at the 13th December meeting; priced at 71%.

Capital Economics notes " would not be surprised if Switzerland recorded deflation in some months next year due to easing price pressures in the services sector". Overall, unless geopolitical or European political tensions escalate significantly, the CHF is likely to remain under pressure, in line with the SNB’s dovish approach, positioning it as a favorable funding currency into 2025.

GBP/CHF 4H Chart

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