The US dollar was holding into the positive territory against a basket of foreign currency at the time of writing, despite a disappointing services PMI reading. Traders are continuing to speculate on the time of the Fed’s next rate cuts with sticky inflation signs weighed against weakening economic indicators. Among the dollar pairs to watch this week, the USD/CHF will remain in sharp focus after Switzerland was caught off guard by Trump’s decision to impose some of the highest tariffs last week. The 39% tariff rate has raised concerns about exports of pharmaceuticals, watches, machinery and chocolate to the nation’s largest export destination for these goods. The tariffs are set to come into effect on Thursday, unless a deal is reached in the next couple of days. The Swiss government is preparing a "more attractive offer" in its trade negotiations with the US in order to avoid higher US tariffs that could severely damage the export-driven economy. A potential deal could boost the franc and undermine the USD/CHF forecast, potentially sending the pair back below the 0.80 handle. Meanwhile, a no deal or a deal with a slightly lower tariff rate could weaken the franc, potentially sending the USD/CHF towards the 0.85 area.
US dollar shows mild reaction as ISM disappoints
The focus for today was the ISM services for July, which was expected to show a mild improvement from the 50.8 reading reported in June. As it turned out, however, the PMI data disappointed expectations and we saw the dollar take a small tumble in immediate response, albeit remained in the positive against most currencies. The 50.1 headline reading was more than one whole point below 51.5 expected and suggests growth in the dominant services sector is stalling.
The details of the ISM report were also alarming. The only component that increased at a faster pace was the Prices Paid sub index climbing to 69.9 against expectations of a drop to 66.5 from 67.5 in June. Everything else either fell or grew at a slower pace, with Employment for example falling to 46.4 from 47.2 and New Orders coming in at 50.3 vs. 51.3 last.
The fact that the US dollar didn’t fall much was perhaps because of that unexpected rise in Prices Paid index, which points to inflationary pressures building into the dominant services sector of the economy, making it difficult for the Fed to justify cutting rates.
Next, we will hear from FOMC voters, Susan Collins and Lisa Cook, on Wednesday. But following the disappointing PMI data today and the employment report on Friday, which showed data in the previous couple of months were revised sharply lower, the risks are now skewed to more than a couple of Fed rate cuts this year. Markets are pricing around 60bp of Fed easing, which seems fair from my point of view. Those expectations are going to change depending on how data evolves in the coming weeks, which is important for the US dollar index and thus the USD/CHF forecast.
USD/CHF forecast: Swiss franc under pressure as tariff deadline looms
If the US goes ahead with shutting its doors to Swiss exports, and foreign currency earnings take a hit, further softening of the franc would make sense. Now interest rates are already at zero in Switzerland, so a 39% tariff rate would certainly raise the risks that the Swiss National Bank might be forced to push rates into negative again. That said, a last-minute compromise still feels likely – perhaps a pharmaceutical arrangement or energy-related concession to sweeten the deal for Washington.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
