Pound / Franc Looks Higher as Investors Bet the SNB Won't Pivot
- Written by: Gary Howes
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- SNB to stand pat as ECB hikes
- Undermining CHF near-term
- But CHF can still rally in 2022 says analyst
- Could imply lower GBP/CHF over coming months
Image © Adobe Images.
The Pound to Franc exchange rate holds a short-term uptrend that could take in the 2022 highs at 1.26 again as investors bet the Swiss National Bank will resist following its Eurozone counterpart down the path to tighter monetary policy.
The SNB has in the past tended to shadow the ECB's monetary policy cycles in an effort to maintain stability but economists at Pantheon Macroeconomics say this time will be different.
"We don't think the SNB will follow the ECB in tightening policy this time around," says the independent research provider says in a note out this week.
The ECB on February 03 laid out intentions to raise interest rates at some point in the coming months, making a substantive departure from a policy of pursuing lower-for-longer rates.
The Euro surged on the ECB's pivot, raising questions as to what the decision would mean for the SNB and Swiss Franc.
Above: The Franc fell against both the Pound (top) and Euro (bottom) following February's monetary updates from the BoE and ECB.
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"Recently, ECB and SNB policy has been joined at the hip, but on this occasion, we think the SNB will stand pat as it's counterpart in Frankfurt tightens," says Melanie Debono, Senior Europe Economist at Pantheon Macroeconomics.
The reason to expect ongoing inaction at the SNB rests largely with inflation: Debono notes Switzerland faces relatively modest inflation.
Inflation rose from -0.5% in January 2021 to 1.5% in December, which ensures it is still below the Bank’s "less than 2%" target.
"More importantly, we expect inflation to fall back over the coming months, reaching 0.5% by year-end. After all, the trend in energy inflation is not 15%, wage pressures remain muted," says Debono.
Another critical reason for the SNB to keep policy unchanged is to ensure the Franc doesn't rise.
Image courtesy of Pantheon Macroeconomics.
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The Franc is a critical part of the SNB's reckoning when it comes to monetary policy, explaining why historically it one of the most active central banks globally when it comes to managing its currency.
The fall in the value of the Franc post-ECB will be welcomed by policy makers who will not want to put recent moves at risk by signalling a shift in monetary policy.
Pantheon Macroeconomics are in fact forecasting a stronger Franc for 2022, which will put downside pressure on the all-important Euro to Swiss exchange rate.
"The spread between our Swiss and EZ inflation forecasts implies a stronger CHF against the euro," says Debono.
"Safe haven demand will remain elevated so long as geopolitical tensions in Ukraine remain, and European financial conditions tighten in response to slowing QE by the ECB," she adds.
Pantheon Macroeconomics are forecasting the EUR/CHF exchange rate to reach 1.03 by the end of 2022.
"We think that the move in EURCHF towards 1.03 this year will put intervention back on the table, in line with the SNB’s actions in the past," says Debono.
How the Pound-Franc exchange rate responds to such an outcome for Euro-Franc will depend on how the Pound-Euro rate responds.
Should Pound-Euro stay stable over the relevant time period then Pound-Franc would fall in lockstep with the depreciation in Euro-Franc.
But a stronger Pound relative to the Euro would imply some stability in Pound-Franc or even some appreciation.
Of course the Pound could weaken against both, but this is not yet something foreign exchange strategists anticipate.
A number of forecasts from leading analysts suggest the Pound can continue to benefit from the Bank of England's desire to hike interest rates, but this source of strength would fade in the second half of 2022 as the Bank steps back from hiking.
So while the short-term outlook looks for further Pound-Franc strength, the medium- to longer-term picture could see some weakness.