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GBP to CHF Exchange Rate Holds Near Highs on Central Bank News

June 16, 2017 - Written by James Fuller

This week’s central bank news has proven to be the biggest influence on the British Pound to Swiss Franc exchange rate. Investors bought the Pound after a surprising Bank of England (BoE) meeting but the Swiss National Bank (SNB) meeting was predictably cautious.

As a result the Pound has recovered from its worst levels. GBP/CHF briefly hit its worst level since January, 1.2242, on Monday, before climbing away from these lows and hitting a weekly high of 1.2467 on Thursday. The pair remained near these highs on Friday morning.

GBP Boosted by Bank of England (BoE) Surprise

This week has been a bumpy ride for the Pound. While political and economic uncertainty remains high amid a new weaker government as well as lower retail activity, this week’s Bank of England (BoE) news came as a pleasant surprise to Sterling investors.

The Bank of England left UK monetary policy frozen at its loosest levels on record as expected, but there was a highly unexpected level of disagreement among policymakers.

As UK inflation continues to soar, some members of the BoE Monetary Policy Committee (MPC) have been feeling the pressure. Three of them voted to hike interest rates, leaving a 5-3 split.

Thanks to hawks Kristin Forbes, Ian McCafferty and Michael Saunders, the bank saw its closest voting split in almost a decade.
Michael Metcalfe, head of macro strategy from State Street Global Markets, stated;

‘What is perhaps more surprising is that the hawkish tendencies of the BoE have not been derailed by the return of political uncertainty following the election,

The BoE’s immediate concern on inflation is trumping what potential political fallout there may be on the economic outlook.’

However, other analysts have pointed out that this hawkishness may not last. Forbes is due to step down from her role as policymaker at the end of the month and her successor may not be quite as hawkish.

Analysts also point out that as wage growth slows and retail activity drops, the bank’s other policymakers are more likely to become increasingly cautious rather than increasingly hawkish.

CHF Demand Limp as Swiss National Bank (SNB) Remains Cautious

Demand for the Swiss Franc has dropped this week as investors digest this week’s Swiss National Bank (SNB) news and SNB President Thomas Jordan’s criticism of the overvalued Franc.

The SNB opted to leave Switzerland monetary policy frozen at its loosest level on record, with negative interest rates looking to stay in the long-term.

Modest inflation rates in major economies as well as the overvalued Swiss Franc were among some of the biggest risks noted by Jordan. Political uncertainty in the Eurozone was also noted.

Until uncertainty eases and the Franc loses some value, Jordan indicated the SNB would continue to intervene in currency markets;

‘It's true that the political situation improved in Europe; that will hopefully diminish the pressure on the Swiss franc to some extent. But we follow exactly the situation in the foreign exchange market, we look at the pressure, and then we decide what to do in foreign exchange interventions’

The Swiss Franc is commonly benefitted from market demand for safe havens amid risks in major economies in recent years, despite economic uncertainty in Switzerland. This has led to the currency being highly overvalued.

GBP/CHF Forecast: UK Political Developments Likely Next Week

While the Pound to Swiss Franc exchange rate looked comfortable holding most of its gains this week due to a weaker Swiss Franc, political and economic uncertainty remains high in Britain.

This will keep pressure on the Pound throughout the coming week, especially as the new government is expected to form and finally start Brexit negotiations.

The Queen’s speech is expected to be held this coming Wednesday which will start the new parliament.

However, uncertainty remains about the stability of the new government, or if an agreement between the Conservative party and Northern Ireland’s Democratic Unionist Party (DUP) will last very long.

Brexit negotiations will be key for Pound exchange rate movement. If the new, weaker government has a negative impact on Britain’s position in negotiations, the Pound outlook will worsen.

With a quiet UK economic calendar next week, political concerns will drive Sterling movement.

The Swiss Franc, on the other hand, could be influenced by trade data from Switzerland next week, including trade balance and current account data. Investors may be hesitant to buy the Franc following the past week’s SNB news however, which could prevent GBP/CHF from falling too far.
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