- USD/CHF locked to Fed cut pricing, 2yr yields
- 131bp of easing priced, funds rate implied at 3%
- Fed unlikely to flag stimulatory policy just yet
- Technicals favour shorts, fundamentals limited downside
USD/CHF Summary Outlook
USD/CHF remains arguably the cleanest play on the U.S. interest rate outlook across the G10 FX universe, meaning Wednesday’s Federal Reserve policy decision and revised funds rate forecasts may be more influential on the pair than most. Unless you believe the Fed will signal a need to push policy rates into stimulatory territory before the easing cycle has played out—implying economic weakness—downside may be limited in the near-term.
Franc and Fed tied at the Hip
Market pricing for Fed rate cuts and USD/CHF have been essentially tied at the hip since the release of the July U.S. nonfarm payrolls in early August, demonstrating a strong relationship with shifts at the front of the U.S. interest rate curve. On a rolling 10- and 20-day basis, its correlation coefficient with market pricing for rate cuts out to June 2026 sits at -0.83 and -0.91 respectively, signalling that when pricing for cuts has increased, USD/CHF has almost always fallen, and vice versa. Similarly, the score with U.S. two-year yields has been equally strong, standing at 0.85 and 0.87 respectively for 10- and 20-day periods.
Given the influence shifts at the front of the curve have had on USD/CHF recently, it suggests that in the absence of that relationship suddenly falling apart, anything that can influence market pricing will almost certainly influence dollar-franc, including Tuesday’s U.S. retail sales report before the FOMC rate decision on Wednesday.
Downside Limited as Rate Cut Pricing Swells?
While the technical picture for USD/CHF remains in favour of playing the pair from the short side (we’ll get to potential setups later), from a fundamental perspective, downside risks may be limited in the near-term given just how much easing is priced in. There’s already 131 basis points of cuts priced into the Fed funds curve out to September next year, which implies a Fed funds rate of 3%.
Source: TradingView
That figure is important as it’s also where the median FOMC member forecast the long-run level for the funds rate three months ago, otherwise known as the nominal neutral rate. That’s the level where policy is estimated to be neither restrictive nor expansionary on economic activity, pointing to stable inflation and unemployment.
Source: Federal Reserve
Though compositional shifts of the FOMC may increase the risk of the median nominal neutral rate forecast being marginally lower on this occasion, the question traders need to ask is whether Fed forecasters want to signal a need to push rates into stimulatory territory given it will point to weakness in the economy. I suspect the public answer will be no, even if in private they see the risk, an outcome that may limit how much more easing markets can price. And, consequently, limit downside in USD/CHF until we receive strong evidence of a need for the Fed to cut aggressively to support the economy—it doesn’t feel like we’re at that point yet.
USD/CHF Consolidates Near July Swing Low
Source: TradingView
While fundamentals point to limited downside risks in the near-term, from a technical perspective, USD/CHF remains an obvious sell-on-rallies prospect. The pair broke out of the bear pennant pattern it had been trading in for several months but is yet to retest the July swing low, attracting bids at .7920 and offers at .8000 over the past week. The consolidation is to be expected given the risk events that lie ahead, but it does provide a blueprint for potential trade setups depending on how Fed pricing evolves.
If the Fed fails to deliver upon dovish market pricing, the 50DMA is the first relevant level above .8000, with a break of that putting downtrend resistance (~.8080) and resistance at .8150 on the radar for longs. However, should the Fed deliver a dovish surprise including a small risk of a 50-point rate cut (which I personally don’t see), a break below .7920 would put a retest of the July swing low of .7873 on the menu. Below that level, there is scant technical support, meaning shorts should be on the lookout for obvious reversal patterns should we see a downside break.
