GBP/CHF Exchange Rate Falters after Discouraging UK GDP Results

• Referendum optimism strongly benefitted Pound – GBP/CHF exchange rate rallied on ‘Brexit’ warnings
• Higher ZEW sentiment survey result failed to bolster Franc – Overvaluation worries persisted
• Bullish Pound run ended by disappointing GDP report – Weaker growth raised concerns over outlook of UK economy
• Swiss Franc forecast to climb on diminished Fed rate hike odds – Dovish US data predicted to benefit safe-haven rival

Although the UK was found to have overshot its borrowing target for the 2015-2016 fiscal year by 4 billion Pounds (GBP), this failed to particularly weigh on sentiment towards the currency. New government borrowing also rose higher than forecast in April, driven up by weaker domestic conditions. Altogether this rather dampened the odds of Chancellor of the Exchequer George Osborne being able to meet his pledge of eliminating the deficit before the end of the current parliament in 2020.

This more bearish result was nevertheless overshadowed by a surge in referendum-based optimism, which pushed the Pound onto a bullish run across the board. Bank of England (BoE) Governor Mark Carney reiterated his previous cautions over the possible negative consequences that a ‘Brexit’ could have on the UK economy. As Carney had been assessed as having significantly more influence over undecided voters than the Chancellor, this was seen to boost the chances of a vote to remain. As a result the Pound Sterling to Swiss Franc (GBP/CHF) exchange rate trended sharply higher throughout Tuesday.

While the latest Swiss trade data proved positive this was not enough to prevent the Swiss Franc (CHF) losing ground to the buoyant Pound. A marked contraction in imports helped to widen the domestic trade surplus from 2.18 billion to 2.50 billion in April. This suggested that the Swiss economy could be showing signs of improvement in spite of global slowdown pressures, benefitting the Franc against some of its safe-haven rivals.

Swiss Franc Weighed Down by Worries Over Strength Despite Improved Economic Sentiment

May’s ZEW Economic Sentiment Survey for Switzerland initially offered some additional encouragement for investors on Wednesday, rising from 11.5 to 17.5. However, this stronger headline figure was undermined by the more muted tone of analysts, who generally remained more cautious over the outlook of the domestic economy. Particular worries were expressed over the relative strength of the Franc, which is expected to continue weighing on the country’s exports. Increasing concerns over the possibility of a further fall in the Euro (EUR) also weighed on sentiment, maintaining pressure on the Franc.

The Pound extended its bullish run in response to a warning from the Institute for Fiscal Studies, which indicated that the UK could experience two additional years of austerity in the event of a ‘Brexit’. However, after the pairing climbed higher to a four-month best of 1.4605, this uptrend came to an end on Thursday morning.

Investors were discouraged by the slowness demonstrated in the latest first quarter UK GDP report, which indicated that growth had been weaker than previously thought. Annual growth was revised lower from 2.1% to 2.0% as the predominant driver of the domestic economy remained the booming service sector. Weaker exports and the first fall in business investment for three years prompted the Pound to soften sharply, pushing the GBP/CHF exchange rate into a slump. Some of this bearishness stemmed from fears that this data could be symptomatic of a greater underlying weakness in the UK economy, although John Hawksworth, Chief Economist with PwC, noted:

‘Global concerns have eased more recently, but uncertainty related to the EU referendum could lead to a further moderation in growth in the second quarter as some businesses continue to defer investment and hiring decisions. But the economy should rebound in the second half of the year in the event of a vote to Remain.’

GBP/CHF Exchange Rate Forecast: Diminished Odds of Fed Rate Hike Predicted to Boost Franc

With no further Swiss data due for release ahead of the weekend, the appeal of the Franc will be primarily tied to wider market sentiment. If risk appetite remains heightened, the safe-haven currency is likely to take a more bearish footing against rivals, although weakness in the US Dollar could equally benefit the Franc. Friday’s US GDP data and commentary from Fed Chair Janet Yellen will likely be major causes of market volatility, with any decrease in the chances of an imminent Fed rate hike expected to dent the GBP/CHF exchange rate.

Demand for the Pound is not likely to pick up tomorrow, as the GfK Consumer Confidence Survey for May is forecast to have dipped from -3 to -4. Declining domestic sentiment could further discourage investors from buying into Sterling, particularly if wider worries over the upcoming EU referendum increase. However, an upside surprise could still help return the Pound to a stronger trend against rivals.

Current GBP, CHF Exchange Rates

At the time of writing, the Pound Sterling to Swiss Franc (GBP/CHF) exchange rate was slumped in the region of 1.4504, while the Swiss Franc to Pound Sterling (CHF/GBP) pairing was making gains around 0.6889.