Pound to Swiss Franc Trend at Possible Inflection Point

"Accordingly, further downside CPI surprises this week (Thu) could trigger a nonnegligible retracement" - Barclays.

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Modest declines for Switzerland's Franc and a buoyant Pound have raised Sterling into the top spot among advanced economy currencies for the year in what potentially marks an inflection point for both currencies ahead of important macroeconomic events for both in the opening week of the new month. 

Switzerland's Franc has been an outperformer of other advanced economy currencies for much of the year and a regular contender for the top spot ever since the Swiss National Bank (SNB) began selling its currency reserves to ward off inflation last summer but GBP/CHF's climb above 1.11 may have marked an inflection point. 

This price action has married the highest inflation advanced economy currency with the lowest inflation advanced economy currency in what is or was an almost poetic reflection of the ever-present market balance between natural and unnatural or otherwise 'real' and 'nominal' influences on asset prices.

However, with Swiss inflation now back to levels consistent with the Swiss National Bank's definition of price stability and the currency weakening ahead of this Thursday's data release, it's possible an inflection point has been reached and one that could see GBP/CHF climbing further up ahead. 

"Direct intervention by the SNB may have played its part, given the central bank’s determination to keep inflation on target amid what it sees as significant second-round effect threats," says Dominic Bunnin, European head of FX research at HSBC, in a Monday research briefing.

Above: Pound to Swiss Franc rate shown at daily intervals. Click image for closer inspection.

Swiss inflation peaked at 3.5% in August 2022 and soon after the SNB said in June it was prepared to be active in the market to keep currency depreciation from stoking inflation. 

The annual pace of inflation has since fallen to 1.7% and figures for June are set to be released just hours ahead of the next Bank of England interest rate decision on Thursday.

But the consensus among economists suggests this will see inflation edge back up to 1.8% and it's not yet clear what that would mean for Swiss exchange rates.

"The Swiss franc remains exceptionally well bid, despite the SNB’s recent dovish surprise. As a result, CHF continues to screen as among the most overbought currencies in the G10," says Sheryl Dong, an FX and macro strategist at Barclays. 

"Accordingly, further downside CPI surprises this week (Thu) could trigger a nonnegligible retracement," she adds in Monday market commentary. 

Appreciation has lifted the trade-weighted or overall measure of the Franc to a record this year and while inflation might yet lead some Swiss pairs to fall, the outlook for GBP/CHF is also complicated by uncertainty over the Bank of England Bank Rate. 

Above: GBP/CHF shown with EUR/CHF and USD/CHF. Click image for closer inspection.

"We wait for the UK MPC to hike, with expectation split down the middle between a 25bp and a 50bp move. That pretty much guarantees a reaction," writes Kit Juckes, chief FX strategist at Societe Generale, in a Tuesday market commentary. 

"With inflation falling, house prices falling and economic sentiment gloomy, a 25bp hike with a warning there could yet be more to come, would seem sensible. But given where expectations are that leaves GBP vulnerable this week," he adds.

Analysts and economists generally forecast Bank Rate to be raised from 5% to 5.25% on Thursday but swap market expectations indicate some probability of a larger move, while there are reasons why any further increase would be difficult for the BoE to justify. 

These include inflation rates having shown signs of convergence with earlier Monetary Policy Committee forecasts back in June as well as the bank's own prior estimation that Bank Rate is already over and above the level that would be necessary to return inflation to the two percent target within its forecast horizon. 

"The BoE got some help on the latest inflation reading and although they still have a pretty big inflation problem, they will feel comfortable toning down the hawkish rhetoric a bit. The domestic economy still has a lot of issues, aside from inflation, and the GBP is just not reflecting that just yet," says Brad Bechtel, global head of FX at Jefferies.