- Soft Swiss inflation not enough to dent Franc uptrend – Safe-haven demand boosted by disappointing Chinese data
- GBP/CHF exchange rate hit seven-week low – Franc strengthened by marked dip in unemployment rate
- Pound rallied on unexpectedly strong UK trade figures – Signs of referendum uncertainty limited
- BoE/TNS inflation forecast predicted to cause Pound volatility – Weaker inflationary outlook could hamper GBP/CHF exchange rate
Swiss Franc Dominant as Gold Nears Fresh Multi-Week High
Gold prices continued to surge higher on Friday morning, nearing a fresh three-week high as worries over the global economy continued to weigh on market sentiment. With confidence in the Pound muted the Pound Sterling to Swiss Franc (GBP/CHF) exchange rate trended lower in the region of 1.3912.
(Previously updated at 15:58 on 09/06/2016)
Persistent Inflationary Weakness Failed to Boost GBP/CHF Exchange Rate
Markets were inclined to adopt a more risk averse outlook on Wednesday in the wake of unimpressive Chinese trade data, which pointed towards a continued weakening of conditions in the world’s second largest economy. A sharper-than-expected contraction in exports on the year prompted investors to flock back into safe-haven assets, such as the Swiss Franc (CHF). This decline in risk appetite also shored up demand for gold further, pushing the precious metal to a three-week high.
Investors were thus not particularly deterred by the news that the Swiss Consumer Price Index had weakened further than anticipated in May. While the annual inflation rate remained static at -0.4% the monthly measure fell back from 0.3% to 0.1%, dampening hopes of a more sustained improvement. However, growing scepticism over the abilities of central banks to ease monetary policy further led investors to largely dismiss this weaker showing, deeming it unlikely that the Swiss National Bank (SNB) will be able to lower interest rates further.
Confidence in the Pound (GBP), meanwhile, failed to improve in the wake of stronger-than-expected UK Industrial and Manufacturing Production figures. April saw a sharp increase in sector output on both the month and the year, seeming to indicate that referendum uncertainty had not been particularly weighing on the domestic economy. As researchers at RBC Capital Markets noted:
‘With this impressive start to Q2, there is a better probability of IP making a positive contribution to Q2 GDP than previously thought. This is however, the first piece of hard data counting towards Q2 GDP, but it may assuage some fears about the magnitude of an EU referendum-related slowdown in GDP growth in Q2.’
Nevertheless, sentiment towards Sterling remained generally muted, with fresh ‘Brexit’ volatility triggered by the news that the referendum registration deadline had been extended.
Lower Swiss Unemployment and Safe-Haven Demand Boosted the Franc (CHF)
Safe-haven demand remained heightened on Thursday after the May Chinese Consumer Price Index was found to have slowed further than forecast. Weaker inflationary pressure raised further concerns about the possibility of a Chinese hard landing still occurring, highlighting the persistent softness in the domestic economy. This maintained the upward momentum of the Franc, particularly as the latest Swiss data proved more positive.
The Swiss Unemployment Rate showed a greater improvement than anticipated in May, dropping from 3.5% to 3.3%. This offered some encouragement in the robustness of the Swiss economy, indicating that conditions are showing signs of improvement in spite of persistently weak inflationary pressure. As a result the GBP/CHF exchange rate slipped to a seven-week low of 1.3871.
Although demand for the Pound weakened sharply in the aftermath of a particularly disappointing RICS House Price Balance it was ultimately not long before the GBP/CHF currency pair began to retake its losses. Sterling rallied on the back of an unexpected narrowing in April’s UK trade deficit, with goods exports showing their single strongest increase since records began in 1998. With referendum uncertainty having eased a little in the absence of further opinion polls this saw the Pound returning to stronger form against a number of its rivals.
GBP/CHF Exchange Rate Forecast: UK Inflation Estimate Predicted to Weaken Pound
The appeal of Pound Sterling could see a renewed decline on Friday in response to the latest BoE/TNS twelve-month inflation forecast, if expectations are shown to have weakened. A softer inflationary outlook would suggest that the Bank of England (BoE) is likely to remain on hold for longer, even in the event of the UK voting to remain within the EU. However, the significance of the report could be undermined by any increase in ‘Brexit’ concerns. The ultimate impact of the referendum, as yet unknown, could equally limit the impact of the data thanks to its knock-on impact on domestic inflation.
Into next week the Franc could experience downside bias ahead of the SNB’s latest policy meeting, even though expectations do not point towards any change at this juncture. The tone adopted by policymakers is likely to be of particular interest to markets, although the impact of any dovishness may be more limited by investor scepticism.
Current GBP, CHF Exchange Rates
At the time of writing, the Pound Sterling to Swiss Franc (GBP/CHF) exchange rate was trending higher around 1.3948, while the Swiss Franc to Pound Sterling (CHF/GBP) pairing was slumped around 0.7166.