- Bullish Services PMI prompted strong Pound rally – Worries over negative Brexit impact eased in response
- Stronger second quarter Swiss GDP failed to boost Franc – Safe-haven demand limited by diminished likelihood of imminent Fed action
- BoE expected to remain on easing bias – GBP CHF exchange rate forecast to soften in response to continued policymaker dovishness
- Heightened risk appetite expected to maintain pressure on CHF – SNB likely to remain dovish on monetary policy
Although recent UK data has proved strong the longer-term outlook for the GBP CHF exchange rate remains somewhat muted.
Stronger UK Services PMI Boosted GBP CHF Exchange Rate
Monday’s stronger-than-expected UK Services PMI saw the Pound (GBP) trending higher against many of the majors. Investors have been encouraged by the suggestion that the UK economy recovered rapidly from the post-referendum shock seen in July, particularly as the service sector accounts for more than three quarters of domestic economic activity. Even so, concerns remain over the outlook of the UK economy and the Bank of England (BoE) is still speculated to be ready to cut interest rates further before the end of the year.
Weaker market risk appetite has weighed on the Swiss Franc (CHF), meanwhile, as the limited odds of an imminent Federal Reserve rate cut diminished the appeal of safe-haven assets. While the second quarter Swiss GDP strongly bettered expectations to rise from 1.1% to 2.0% on the year this was not enough to encourage greater demand for the Franc. As a result the Pound to Swiss Franc (GBP CHF) exchange rate maintained its uptrend on Tuesday.
Odds of BoE Easing Predicted to Maintain Pound (GBP) Downside Bias
Despite the general bullishness of recent UK data the Pound is still expected to come under increased pressure in the run-up to the BoE’s September policy meeting. While the August raft of PMIs would seem to encourage a more hawkish outlook on the domestic economy the impact of the volatile survey is likely to be somewhat limited. Harder economic data will be the true test of the UK’s resilience in the wake of the Brexit vote, with post-referendum labour market data and the third quarter GDP likely to be particularly crucial.
Even if the BoE remains on hold at its meeting on the 15th the possibility of interest rates being lowered further should not be ruled out. Thus the Pound is expected to remain biased to the downside, as Derek Halpenny of MUFG notes:
‘While we see near-term upside risks we are still cautious on the sustainability of any upside move given that political developments in the UK are likely to come back into focus after the summer break and that points to the potential for political uncertainty starting to weigh on sentiment going forward.’
Swiss Franc (CHF) Demand Forecast to Remain Tied to Risk Appetite
The Swiss National Bank (SNB) will also be meeting to discuss monetary policy on the 15th September, although market expectations are not quite so heightened for this decision. Even so, the Franc could be dented if policymakers continue to express dissatisfaction with the domestic inflation situation. Despite the SNB’s easing measures the Swiss Consumer Price Index has remained stubbornly weak, even though it edged slightly higher from -0.2% to -0.1% on the year in August.
Regardless of domestic developments the Franc is also expected to see continued movement in response to market risk sentiment. Should the odds of the Federal Reserve raising interest rates before the end of the year rise again then the GBP CHF exchange rate is likely to weaken, with safe-haven demand strengthening in response to any US Dollar (USD) bullishness.
Current GBP, CHF Exchange Rates
At the time of writing, the Pound to Swiss Franc (GBP CHF) exchange rate was trending narrowly around 1.3056, while the Swiss Franc to Pound (CHF GBP) pairing was slumped in the region of 0.7653.
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