Swiss Franc gives back gains, but US Dollar struggles with Inflation data on tap

USD/CHF trims losses and returns above 0.8100 ahead of US inflation data.
Monetary policy divergence between the SNB and the Fed is weighing on the Swissie.
US PPI is expected to confirm that inflation pressures increased in August.

The Swiss Franc (CHF) has given back previous daily gains against the US Dollar (USD) in a calm trading session on Thursday, as the USD/CHF pair returned above 0.8100, although it remains halfway through the weekly trading range. The Swissie is suffering amid the unfavourable monetary policy divergence between the Swiss National Bank (SNB) and the rest of the major central banks, while the US Dollar remains vulnerable ahead of the release of US inflation figures.

Risk appetite remains subdued on Thursday as Oil prices climb to the feared $100 area, pushing global yields higher and threatening to tip the global economy into recession, as hostilities between the US and Iran escalate and hopes of a negotiated end of the conflict fade.

Dollar debasement trade weighs on the USD ahead of US inflation releases

On the macroeconomic front, the market awaits US inflation figures to confirm hopes of a Federal Reserve (Fed) rate hike next week, which are priced at 60% at the moment. US Producer Price Index (PPI) figures due later on Thursday are expected to show that inflation at factory gates accelerated to a 5.3% year-over-year (Y-o-Y) rate in August from 4.7% in July, with the core PPI rising to 4.6% in the twelve months to August from 4.2% in the previous month.

USD volatility, however, is expected to remain muted, with all eyes on Friday's Consumer Price Index (CPI) report. DBS Group Research’s Philip Wee argues that "a hotter US inflation print should typically lift the USD," but that the current backdrop of stronger US data, higher Fed hike odds, and elevated energy prices "leaves room for near-term limited USD gains,” which he sees as “an opportunity for markets to get back into the underlying USD debasement trade.”

In Switzerland, the economic docket has been thin this week, but data released last week showed that retail consumption and consumer inflation grew beyond expectations, and that Gross Domestic Product grew at its fastest pace in five years in the second quarter. These figures, however, do not alter the view that the SNB will keep interest rates at 0% this year and well into the next, and, therefore, the positive impact on the Swiss Franc has been limited.

Economic Indicator

Producer Price Index ex Food & Energy (YoY)

The Producer Price Index ex Food & energy released by the Bureau of Labor statistics, Department of Labor measures the average changes in prices in primary markets of the US by producers of commodities in all states of processing. Those volatile products such as food and energy are excluded in order to capture an accurate calculation. Generally speaking, a high reading is seen as positive (or bullish) for the USD, whereas a low reading is seen as negative (or bearish).

Economic Indicator

Producer Price Index (YoY)

The Producer Price Index released by the Bureau of Labor statistics, Department of Labor measures the average changes in prices in primary markets of the US by producers of commodities in all states of processing. Changes in the PPI are widely followed as an indicator of commodity inflation. Generally speaking, a high reading is seen as positive (or bullish) for the USD, whereas a low reading is seen as negative (or bearish).