USD/CHF forecast as odds of negative Swiss interest rates rise

The USD/CHF exchange rate has remained in a narrow range in the past few months as investors watched trade relations between Switzerland and the United States. It has remained inside the support of 0.7865 and the resistance at 0.8152. So, what’s next for the Swiss franc?

Franc steady after the US and Switzerland deal 

The USD/CHF exchange rate remained in a tight range in the past few months as the trade relations between the United States and Switzerland evolved. 

The crisis between the two countries culminated in a deal that was announced earlier this month. In a statement, Jamierson Greer announced that the US and Switzerland reached an agreement that lowered tariffs on most items from 39% to 15%.

In exchange, Switzerland and Liechtenstein companies agreed to invest $200 billion in the United States in the next five years. $67 billion of these funds will be invested in the coming year.

A report released on Friday showed how the trade war impacted the Swiss economy. In a report, the country’s statistics agency noted that the economy shrank by 0.5% in Q3 after expanding by 0.2% in the previous quarter. This contraction was better than the median estimate of 0.4% and was the first one since the pandemic.

The economy expanded by 0.8% on a YoY basis, much lower than the second quarter’s growth of 1.5%. Most of this slowdown was mostly because of the relatively weak exports to the United States.

Negative Swiss interest rates 

The USD/CHF exchange rate remained in this range as the Swiss inflation continued falling.

Data compiled by the statistics agency showed that the country’s inflation has remained so low this year. The most recent report revealed that October’s inflation dropped to 0.10% on a YoY basis and minus 0.25% on a MoM basis. That is a sign that the country has now moved into a deflation period.

As a result, there is a likelihood that the Swiss National Bank (SNB), will continue cutting interest rates and moves them below zero. In a recent statement, Martin Schlegel, the bank’s head said that negative rates would go negative if needed. A Bloomberg analyst said:

“The central bank appears ready to live with a stronger franc, relying instead on targeted foreign-exchange interventions and enhanced communication to anchor market expectations.”

USD/CHF technical analysis 

The daily timeframe chart shows that the USD/CHF exchange rate dropped from the year-to-date high of 0.9200 in February to a low of 0.7865 in September.

It has remained in a narrow range as investors waited for the next catalyst, which will be the Federal Reserve and SNB interest rate decisions.

The pair has remained slightly above the 50-day Exponential Moving Average (EMA). It has formed a bearish flag pattern, which is a common bearish sign.

Therefore, the pair will likely remain in this range in the near term and then have a bearish breakdown. More downside will be confirmed if it moves below the key support at 0.7865. A move below that level will point to more downside, potentially to the psychological level at 0.7800.

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