Insights 
VT 
The US Dollar rose slightly past 0.8050 in the early European session, continuing its four-day climb. This increase is buoyed by the Swiss Franc’s weakness, spurred by Swiss CPI revealing stronger deflationary pressures in October.
Swiss consumer inflation contracted by 0.3% in October, following a 0.2% downturn in September, missing the expected improvement to -0.1%. The annual inflation rate dropped to 0.1%, from 0.2% the previous month, contrary to market forecasts of a rise to 0.3%.
Monetary Policy Implications
These figures put pressure on the Swiss National Bank (SNB) to consider reducing rates further below 0%. The SNB President has shown reluctance to this move, despite growing deflationary pressures.
The Federal Reserve recently lowered interest rates, but its chairman indicated a December cut remains uncertain. This situation reflects a monetary policy divergence, continuing to bolster the US Dollar. Upcoming US private data is under observation, with expectations of improvements in manufacturing indices. The S&P Global Manufacturing PMI is projected to rise to 52.2, while the ISM PMI may continue its decline, anticipated at 49.2, slightly down from 49.1.
We are seeing a clear signal from the latest Swiss inflation numbers, which missed expectations significantly. This deflationary pressure puts the Swiss National Bank in a tough spot, making a future rate cut more likely. Consequently, this strengthens the case for a weaker Swiss Franc against the US Dollar.
Trading Strategies and Market Sentiment
Looking back, we remember the SNB’s aggressive use of negative rates during the deflationary period of 2015-2021 to weaken the Franc. Current overnight index swaps seem to be pricing in over a 60% chance of a rate cut by the end of the year, a jump from just last week. This market sentiment suggests traders are positioning for the SNB to act sooner rather than later.
On the other side of the trade, the US Dollar remains strong due to the Federal Reserve’s stance. While the Fed did cut rates last week, the CME FedWatch Tool now shows the market is pricing in less than a 25% chance of another cut in December. This policy divergence with the dovish SNB is the main driver pushing the USD/CHF pair higher.
For derivative traders, this suggests looking at bullish strategies on the USD/CHF pair. Buying call options with strike prices above 0.8100 for the coming weeks could offer a way to profit from the expected upward move with defined risk. Long positions in futures contracts are a more direct way to express this bullish view.
In the immediate term, we are watching today’s US ISM Manufacturing PMI for any signs of economic weakness that could challenge this outlook. Beyond that, any commentary from SNB officials about the deflation figures will be critical. Upcoming US inflation and jobs data will also be key to confirming the Fed’s less-dovish path.
