The USD/CHF pair is trading flat around the 0.8060 level during the late Asian trading session on Wednesday. The CHF pair is consolidating as investors await the monetary policy announcement by the Federal Reserve, which is scheduled for 19:00 GMT.
At press time, the US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, is trading flat around 99.20.
The US dollar is having difficulty finding direction as investors are uncertain about the US interest rate outlook, while remaining confident that there will be a rate cut at Wednesday’s meeting. Market participants suspect the Fed will take a dovish stance on the monetary policy outlook as inflationary pressures remain well above the 2% target.
According to the CME FedWatch tool, the probability that the Fed will cut interest rates by 25 basis points to 3.50%-3.75% at its December policy meeting is 87.6%. This will be the third rate cut by the Fed in a row.
From now on, the Swiss Franc (CHF) will also be affected by the monetary policy announcement of the Swiss National Bank (SNB) on Thursday. The SNB is expected to keep interest rates steady at 0%, and will not push them into negative territory, even as the CPI remains flat year-on-year in November.
SNB President Martin Schlegel said in his latest commentary that the hurdle to pushing interest rates into negative territory is high due to “undesirable side effects” on savers and pension funds.
Federal Reserve Bank Questions and Answers
Monetary policy in the United States is shaped by the Federal Reserve Bank (Fed). The Federal Reserve has two missions: achieving price stability and promoting full employment. The primary tool for achieving these goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, it raises interest rates, which increases borrowing costs throughout the economy. This causes the US dollar (USD) to strengthen because it makes the United States a more attractive place for international investors to park their money. When inflation falls below 2% or when the unemployment rate is very high, the Fed may lower interest rates to encourage borrowing, which affects the dollar.
The Federal Reserve (Fed) holds eight policy meetings annually, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC meeting is attended by twelve Fed officials – the seven members of the Board of Governors, the New York Fed president, and four of the remaining eleven regional Fed presidents, who serve one-year terms on a rotating basis.
In extreme cases, the Fed may resort to a policy called quantitative easing (QE). Quantitative easing is the process by which the Federal Reserve dramatically increases the flow of credit into a stuck financial system. It is a non-standard policy measure used during crises or when inflation is very low. It was the Fed’s weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. Quantitative easing usually weakens the US dollar.
Quantitative tightening (QT) is the reverse process of quantitative easing, where the Fed stops purchasing bonds from financial institutions and does not reinvest capital from bonds it holds outstanding, to purchase new bonds. This is usually positive for the value of the US dollar.
