With the BoE holding rates last week, GBP strength is expected to persist, further supported by improving global risk sentiment. In contrast, SNB is expected to cut their interest rate to 1.0% from 1.25% tomorrow and also expect they will address the recent strength of CHF during the meeting by announcing aggressive FX intervention.

GBP: Best in the G10 Currencies

As anticipated, the recent BoE decision to maintain interest rates reflects a cautious stance on monetary policy amid ongoing inflationary pressures, which diminish the likelihood of aggressive cuts in the near future. The market now forecasts a gradual easing cycle, with only one potential 25 basis point cut expected later this year. Recent economic data supports this outlook: the unemployment rate has decreased, and the RICS housing market survey indicates significant improvement, particularly in new buyer inquiries, pointing to a resilient housing market. August retail sales exceeded expectations, enhancing the outlook for consumer spending, although concerns about consumer confidence persist, especially with potential fiscal austerity measures in the upcoming UK budget.

The GBP has shown resilience, benefiting from the relative hawkishness of the BoE compared to other central banks that have adopted dovish stances. This advantage has allowed the GBP to maintain strength and attract inflows into UK assets, particularly if global conditions, like the US avoiding recession, remain favorable. However, risks remain. The market has adjusted its easing expectations for the BoE, with some of these adjustments already reflected in the GBP’s value, making it vulnerable to profit-taking if upcoming data disappoints. Additionally, fiscal concerns stemming from the Labour Party's plans could undermine any positive growth momentum.

In summary, while the GBP is positioned for potential short-term gains due to supportive economic indicators and a cautious BoE, it must navigate external market dynamics and domestic fiscal challenges carefully. Although the UK Flash PMI released yesterday shows disappointment, but from a policy standpoint, the PMI release is unlikely to significantly affect market pricing for the November meeting, as the MPC is more focused on services inflation and real wage trends.

CHF: Another rate cut this week

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.

GBP/CHF 4H Chart