March 6, 2020 - Written by Ben Hughes
STORY LINK GBP to CHF Exchange Rate Slumps to 4 Month Worst as Coronavirus Prompts Safe Haven Surge
Despite the market’s rising expectations for interest rate cuts from the Swiss National Bank (SNB), Bank of England (BoE) interest rate cut bets are even more significant this week and the British Pound to Swiss Franc (GBP/CHF) exchange rate has seen notable losses. Brexit uncertainties and coronavirus developments are offsetting Britain’s decent economic outlook and keeping BoE interest rate cut bets high.
Having already fallen significantly through February, GBP/CHF slipped even lower over the past week. After opening last week at the level of 1.2371, GBP/CHF spent the week trending lower due to BoE speculation and safe haven demand.
Before markets closed on Friday, GBP/CHF trended near lows of 1.2149. This was the lowest level for GBP/CHF since October 2019 – over four months ago.
GBP/CHF has fallen significantly over the past month, but unless the Bank of England or Brexit outlooks improve the pair may continue to fall.
GBP Exchange Rates Slump on Bank of England (BoE) Rate Cut Speculation and Brexit Jitters
The Pound has been hugely volatile lately. At the beginning of the year, optimism over Brexit and domestic data caused the British currency to surge, but in the past few weeks Sterling has plummeted and shed most of those gains.
Hard Brexit fears have returned due to the tough negotiation stances taken by UK and EU officials.
On top of that, this week has seen Sterling slump as the coronavirus outbreak spreads across the globe and dampens the global economic outlook.
Covid-19 has spread from China and economists are concerned that it will have an impact on global economic activity in the coming months. As a result, speculation has surged that major central banks will cut interest rates in order to protect economies from slowdown.
This was quickly proven true as the Federal Reserve announced an emergency interest rate cut. The Pound was hit by concerns of an emergency Bank of England (BoE) rate cut as well.
However, towards the end of the week emergency rate cut speculation softened. Markets anticipate possibly multiple BoE rate cuts this year, but an emergency one is no longer expected ahead of the bank’s planned policy decision later in March.
Due to the coronavirus impacting BoE rate cut bets, Brexit uncertainty has slipped into the background slightly for Pound investors. According to Lee Hardman, Currency Analyst at MUFG:
‘it is certainly possible that Brexit risk remains in the background as a Pound driver for longer now
there has already been speculation that coronavirus-related disruption could prompt policymakers to alter the timeline for negotiations’
CHF Exchange Rates Surge on Safe Haven Demand despite Gloomy Outlook
The Swiss Franc is a safe haven currency which is often broadly appealing in times of global market uncertainty. As a result, it has seen a jump in demand amid the market’s panic over Covid-19.
However, this is despite Switzerland’s mixed economic outlook.
While some of this week’s Swiss data has beaten forecasts, inflation was weaker than expected. On top of this, the Swiss Franc continues to rise on safe haven demand which some speculate is causing problems for the Swiss National Bank (SNB).
Due to the coronavirus outbreak, multiple major central banks have signalled that rate cuts to protect economic activity are on the way.
Three major banks have already cut rates, including the Reserve Bank of Australia (RBA), Federal Reserve and Bank of Canada (BoC).
The Bank of England (BoE) is expected to cut rates later in the month, and the European Central Bank (ECB) is speculated to take some action when it meets next week.
As a result of this and the Swiss Franc’s rising strength, the SNB is coming under increasing pressure to cut rates as well.
This is limiting the Franc’s appeal as a safe haven currency, but for now safe haven demand is overshadowing SNB rate cut bets.
GBP/CHF Exchange Rate Forecast: Coronavirus and Central Bank Bets Remain the Focus
Next week’s economic calendar will be a little quieter.
Some notable UK and Swiss data will be published throughout the week. This includes Switzerland unemployment rate data on Monday, and UK growth and production on Wednesday.
Overall though, unless these stats have a notable impact on UK or Swiss economic outlooks, GBP/CHF is more likely to be influenced by market developments regarding Covid-19 and how this influenced central bank speculation.
If the number of coronavirus cases in Britain rises considerably then concerns of its impact in the UK could rise. This would lead to higher Bank of England (BoE)
interest rate cut bets and keep the Pound weak.
The Swiss Franc, on the other hand, could struggle to sustain its safe haven appeal if Swiss National Bank (SNB)
interest rate cut bets rise too much.
If the European Central Bank (ECB) cuts Eurozone interest rates next week for example, SNB rate cut bets will likely rise further.
This could drag on the Swiss Franc and this may be one of the easiest ways for the Pound to Swiss Franc exchange rate to advance next week.
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TAGS: Pound Swiss Franc Forecasts