Franc Hit by Inflation Undershoot, GBP/CHF Holds Constructive Outlook

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The Swiss Franc fell after Switzerland reported below-consensus inflation figures that left markets confident the central bank could cut interest rates further.

The Pound to Franc (GBP/CHF) rose to 1.1524 - its highest level in more than two months - after the FSO said inflation was at 0% month-on-month in June, down from 0.3% in May and below consensus estimates for 0.1%. The annual growth rate is now at 1.3%, down from 1.4%, undershooting consensus expectations for 1.4%.

Of note, imported inflation was a drag, potentially due to recent CHF strength, which could mean the SNB will be more comfortable making decisions consistent with currency weakness (i.e. cutting rates further). "Imported inflation declined to -0.8% y/y from -0.6%, as CHF weakening has ended over the last two months," says Noah Buffam, an analyst at CIBC Capital Markets.

"Doves are cooing for a third consecutive interest rate cut from the Swiss National Bank following Thursday's softer than expected Swiss inflation data – which is music to the ears of franc bears," says Robert Howard, a market analyst at Reuters.

At the time of writing, GBP/CHF has since pared its initial gains, but the near-term uptrend is intact as the RSI is pointed higher and the exchange rate trades above its key moving averages. "The Franc is particularly disadvantaged against the Pound, which can rely on the Bank of England's elevated base rate," says Artiom Pucinskij at MoneyTransfers.com.

The Euro to Franc - a key exchange rate for the SNB - also relinquished its post-CPI gains but is also constructive from a technical perspective at 0.9717.

"Scope for another SNB rate reduction in September might lift EUR/CHF to 0.9930 (13-month EBS high on May 27), if not 1.00. The cross was last at 1.00 in March 2023," says Howard.

The next Swiss rate decision is on September 26, five days before Martin Schlegel succeeds Thomas Jordan as SNB Chair.

The Swiss Franc stormed higher in May and June as it reversed its 2024 slide, but that strength now looks to have been more of a corrective reversal than an outright flip into a determined trend of appreciation.

Recent weakness follows the SNB's second interest rate cut of the year on June 20.

"The SNB is doing the right thing," says Dr. Thomas Gitzel, Chief Economist at VP Bank. "If it had remained put, as the majority of economists expected, this could have given the impression that policymakers were unsure about the last interest rate move in March."

A further 'dovish' development for the Franc came as the SNB lowered its inflation forecast profile, which means it is comfortable with the view that inflation will continue to decline, even as interest rates fall.

However, today's inflation figures undershoot the central bank's most recent predictions, which can further incentivise policymakers to cut again.