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Narrowed Swiss Foreign Reserves Failed to Boost Pound Swiss Franc Exchange Rate

January 6, 2017 - Written by John Cameron

A modest improvement in the Swiss Consumer Price Index weighed on the Pound Sterling Swiss Franc (GBP CHF) exchange rate, even though domestic inflationary pressure remains a long way short of the Swiss National Bank’s (SNB) target.

Strong UK PMIs Failed to Prevent GBP CHF Downtrend

Confidence in the resilience of the UK economy was boosted this week by the unexpectedly strong performance from December’s raft of PMIs, which all demonstrated continued sector expansion.

This indicated that the negative impact of the Brexit vote has moderated further, seeming to bode well for the domestic economy in the coming months.

However, signs that inflation is likely to rise sharply over the course of 2017 alongside dovish commentary from Bank of England (BoE) chief economist Andy Haldane maintained the generally bearish trend of the Pound (GBP).

Consumer spending has served to underpin the domestic economy in recent months, raising the prospect of a greater slowdown if the pressure on wages begins to bite and put additional downside pressure on Sterling.

Risk Appetite Hampered Swiss Franc Strength

Although December’s Swiss foreign currency reserves unexpectedly narrowed, this was not enough to boost the GBP CHF exchange rate ahead of the weekend.

Demand for the Franc (CHF) generally softened, however, as the rival safe-haven US Dollar (USD) returned to bullish form ahead of the latest Non-Farm Payrolls report.

Investors remain somewhat reticent over the outlook of the Swiss economy, particularly as Monday’s retail sales figures are forecast to show a sharp contraction on the year.

With the mood of financial markets still leaning towards higher-yielding currencies and expectations pointing towards continued dovishness from the SNB the Franc has struggled to find support at the start of the year.

GBP CHF Exchange Rate Volatility Likely Ahead of Theresa May Speech

The Halifax house price index could offer the GBP CHF exchange rate a rallying point on Monday, providing that the UK housing market continues to demonstrate signs of strength.

Even so Brexit-based jitters could continue to drag on the Pound in the near term, with Derek Halpenny, European Head of GMR at MUFG, noting:

‘The UK is likely to be tied to the EU for a lot longer than two years and our sense is the upcoming speech by PM May will focus more on relaying this transition aspect to a deal. The longer the transition, the less concerned markets should be over negative implications, which should help support the Pound.’

If China’s Consumer Price Index shows weakness then the Franc could be boosted by an increase in safe-haven demand, meanwhile.

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