We are bullish on the EUR, but primarily against low-risk currencies like CHF and JPY. Currently, policy divergence is working in favor of the EUR against these currencies. In contrast, the SNB is expected to cut its interest rate from 1.25% to 1.0% today. Additionally, the SNB may address the recent strength of the CHF by announcing aggressive FX intervention during the meeting. This shift in policy could further weaken CHF, reinforcing our bullish outlook for EUR in this pair.

EUR: Selected bullish

Despite the ECB's 25bp hike in September, the statement maintained a "data-dependent" approach. Growth forecasts were modestly downgraded, while core inflation for 2024 and 2025 was revised upwards. President Lagarde refrained from signaling an October rate cut, citing limited new data and steady inflation, which may temper market expectations for an immediate cut, offering mild support for the EUR. Several ECB members emphasized persistent inflation, reinforcing their comfort with holding rates steady. The hawkish tone may reduce easing expectations, supporting the EUR, particularly against central banks moving towards rate cuts.

While softer PMI data released on Monday increased market bets on an October cut, these pressures haven't yet triggered a significant recalibration of ECB policy. The local backdrop is unlikely to create substantial downward pressure on the EUR. Many ECB members prefer waiting until December for a cut, allowing more time to assess incoming data. This policy divergence, particularly with central banks like the SNB that are more aggressively cutting rates, could benefit the EUR for now.

CHF: Another rate cut today

From a broader perspective, the outlook for the CHF depends largely on interest rate differentials and overall risk appetite. In the coming weeks, the rate differential increasingly appears to work against the CHF, especially as the market anticipates a potential rate cut from the SNB this week. August inflation data came in at 1.1% year-on-year, falling short of the SNB’s forecasts, indicating that the central bank may have room for further interest rate reductions this year. Looking ahead, attention will be on the SNB's September meeting, where easing is likely, though there are questions about whether the cut will be 25 basis points or a more aggressive 50 basis points.

Overall, domestic developments support a bearish outlook for the CHF, with additional rate cuts expected. Unless there are adverse developments, such as geopolitical tensions or fears of a US recession, the CHF is likely to remain under pressure and could be sold on rallies.

EUR/CHF 4H Chart

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