USD/CHF in tight range ahead of SNB interest rate decision
- The USD/CHF was little changed as investors reacted to strong US retail sales numbers.
- The pair also reacted to the growing risks from the Korean peninsula.
- Focus now shifts to the SNB, which is expected to leave interest rates unchanged on Thursday.
The USD/CHF pair was little changed today as investors reflected on the positive US retail sales, the latest actions by the Fed, and the economic forecasts by SECO.
US retail sales blast through estimates
The US economy is bouncing back. Earlier this month, data from the Bureau of Labour Statistics (BLS) showed that the US added more than 2.5 million jobs in May while the unemployment rate declined to 13.3%. Subsequent data, including industrial production, consumer confidence, and manufacturing PMIs showed that activity improved in May.
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Now, Americans are increasing their shopping activities. That is according to the latest retail sales data released by the Census Bureau.
The numbers showed that retail sales increased by a whopping 17.7% in May after dropping by a 14.7% in April. The number surprised analysts, who were expecting an increase of 8.0%. The sales rose to $485.5 billion from the previous $412 billion.
The core retail sales, which exclude the volatile food and energy products, rose by 12.4% after falling by 15.2% in the previous month.
According to the bureau, retail trade sales rose by 16.8% while nonstore sales rose by 30.8%. At the same time, building material and garden equipment and supplies dealers rose by 16.4%.
In addition to the retail sales, data from the Federal Reserve showed that industrial production and manufacturing production rebounded in May. The two rose by 1.4%and 3.8%respectively after falling by 11% and 13.7% respectively.
These numbers came a day after the Federal Reserve announced that it would start purchasing individual corporate debt. These purchases will be in addition to the bonds that it is buying through bond ETFs.
USD/CHF wavers as global risks rise
The USDCHF pair was muted in a day that global risks continued to rise. In normal times, the pair tends to react to geopolitical issues because the Swiss franc is often viewed as a safe haven currency.
Three key geopolitical issues happened today. First, Donald Trump confirmed that the US would remove about 25,000 troops from Germany. He said that the move was mostly because Germany has not been paying its fair share to NATO.
Second, in an unconventional move, North Korea destroyed the liaison office in the demilitarised zone. That risks escalating tensions in the peninsula at a time of a pandemic. The destruction came a week after the North cut-off high level communications with the south.
Third, three Indian soldiers died today as a conflict between India and China escalated. A conflict between the most populated countries in the world is a major geopolitical issue.
Switzerland heads to worst recession
The USDCHF pair also reacted to the latest forecast by the State Secretariat for Economic Affairs (SECO). In its report, the office said that the country’s economy will contract by 6.2% this year because of the coronavirus pandemic. This contraction is slightly better than the 6.7% decline it had projected in the previous meeting. They also expect the economy will recover by 4.9% in 2020.
According to the bureau, the country will achieve this growth provided that there is no second wave of the virus. Also, the recovery will depend on low levels of corporate bankruptcies and increased investments.
The report said:
“On the one hand, the economy could recover faster than the forecast assumes, if, for instance, the measures are relaxed more quickly, Swiss consumers prove to be less unsettled by the coronavirus or other countries make up lost ground more strongly than anticipated.”
The report came two days before the SNB delivers its interest rate decision. Analysts polled by Bloomberg expect the bank will leave interest rates unchanged at minus 0.75%. Because of the today’s data, some expect that the bank will announce more accommodative policies.
Some analysts also believe that the bank will surprise the market by moving interest rates further negative.
USD/CHF technical outlook
The USD/CHF pair is trading at 0.9490, which is lower than 0.9900, the highest point in May. The recent decline could push the SNB to announce measures that will weaken the franc. On the daily chart, the price is below the 50-day and 100-day exponential moving averages.
Also, the Average True Range (ATR), which measures volatility has been on an upward trend. Therefore, there is a likelihood of a significant breakout in the next few days. As such, the key levels to watch will be 0.9600 and 0.9400.