The USD remain bullish, driven by strong fundamentals and resilient economic data as well as potential labor market recovery. 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.

USD: Still the king

The baseline of USD remain supported in the near term, as driven by favorable economic fundamentals, policy expectations, and anticipated market data. Political developments, such as the nomination of Scott Bessent as Treasury Secretary, have mitigated concerns about aggressive trade policies under Trump’s administration. Bessent’s “Three 3s” policy—focused on reducing the budget deficit, boosting GDP growth through deregulation, and increasing oil production—supports a stable and growth-oriented approach, which has strengthened market confidence. Meanwhile, Trump's recent tariff threats against Canada and Mexico appear tied to non-economic issues like drug enforcement and migration, making them less impactful on the USD.

Aside politic, the economic data continues to underpin the dollar. The October PCE report confirmed stable inflationary pressures, with core inflation rising 0.3% m/m and 2.8% y/y, up from 2.7% in September. This reinforces expectations that the Federal Reserve remains data-dependent, with markets pricing a 58% chance of a 25bps rate cut in December. The FOMC minutes highlighted balanced risks between inflation and employment, with some members advocating for maintaining restrictive rates and others signaling readiness to ease if labor market conditions or growth weaken.

Looking ahead, market focus will shift to the November Non-Farm Payrolls (NFP) report as it could clarify the Fed’s policy direction for December. October's payrolls were impacted by strikes and hurricanes, showing weaker-than-expected figures. ING highlights that November’s report could see a rebound, with a baseline increase of 109k jobs excluding the strike effects, alongside the return of 44k striking workers and an estimated 65k previously uncounted due to hurricane disruptions. A robust November payroll figure would bolster USD strength, solidifying the case for a Fed pause. Overall, the combination of robust fundamentals, steady inflation data, and potential for stronger labor data reinforce a bullish near-term outlook.

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.

USD/CHF 4H Chart

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