Demand for safe haven currencies like the Swiss Franc has surged this week, due to market jitters surrounding the possibility of a US-sparked global trade war. This has been the primary cause of British Pound to Swiss Franc (GBP/CHF) exchange rate losses this week, but domestic factors have only exacerbated GBP/CHF losses.
Concerns about European Central Bank (ECB) cautious made it easier for GBP/CHF to climb from 1.3200 to 1.3244 last week, but this week so far GBP/CHF has been selling sharply. At the time of writing, GBP/CHF trended near a fortnight low of 1.3103 and could see further losses later in the week depending on Bank of England (BoE) developments.
GBP Kept Under Pressure by Bank of England (BoE) and Brexit Uncertainties
Investors have had little reason to buy the Pound this week so far. Last week’s UK economic data was largely underwhelming, economists have a cloudy outlook of Britain’s economy, and the UK government continues to face fresh obstacles in the Brexit process.
On Monday evening, UK Prime Minister Theresa May’s Brexit plans suffered a defeat in the UK House of Lords regarding the final divorce deal between the UK government and the EU.
The House of Lords backed an amendment to give UK MPs a vote on the final Brexit deal, sending the bill back into the House of Commons for further debate.
According to Jasper Lawler, head of research from London Capital Group:
‘This will not only test May’s ability to steer a minority government, but also the pounds buoyancy as pro-EU rebels promise they can collapse the government if their demands aren’t met,
Theresa May showing signs of weakness and an inability to control her party wouldn’t bode well for the future as several other pieces of legislation are still needed in order to prepare for Brexit.’
On top of the latest Brexit uncertainties, Bank of England (BoE) caution is keeping pressure on the Pound.
As recent UK data has disappointed, investors are hesitant to buy the Pound until the Bank of England offers its latest views on the UK economic outlook.
As a result, Sterling’s movement will remain limited until Thursday’s Bank of England policy decision.
CHF Supported by Safe Haven Demand and Swiss Government’s Warnings
The Swiss Franc has seen a surge in demand this week, as markets have become increasingly anxious about the possibility of a global trade war due to rising trade tensions between the US and China.
The US and China have continued to ramp up trade tariffs against one another in an almost tit-for-tat escalation.
As the perceived chance of a trade war emerging between the US and China has worsened, investors are increasingly seeking out safe haven currencies like the Swiss Franc.
The Franc has seen mixed performance over the past year, but has seen a strong recovery in recent months due to rising global risks, largely due to US trade protectionism.
On top of this though, Switzerland’s government published its latest economic forecasts on Tuesday and predicts there may be further strength ahead for the Swiss Franc.
According to the State Secretariat for Economic Affairs, Italy’s new government posed an upside risk to the Swiss Franc which could negatively impact Switzerland’s economy:
‘While the newly elected government recently reaffirmed that it does not intend to leave the monetary union, its program, which proposes in particular expansionary fiscal policy measures implying a deterioration in the country’s budget, is creating major uncertainty,’
GBP/CHF Forecast: Central Bank Decisions in Focus
With a lack of data due for publication on Wednesday and major Central Bank news expected on Thursday, the Pound to Swiss Franc (GBP/CHF) exchange rate’s trajectory is unlikely to change until then.
Unless there is a sudden easing of US-China trade tensions, the Swiss Franc is likely to remain high in demand and will easily hold its ground against a limp Sterling.
GBP/CHF trade could see a significant shift in direction on Thursday though, depending on what tones the Swiss National Bank (SNB) and Bank of England (BoE) take in upcoming policy decisions.
If the Swiss National Bank reflects the Swiss government’s concerns about the upside risks in Swiss Franc trade, investors are unlikely to sell the Franc.
Of course, the bank may attempt to limit Swiss Franc strength by focusing on a cautious or dovish tone regarding Switzerland’s economic outlook.
As for the Bank of England, any comments the bank makes about its UK economic outlook are likely to influence the Pound.
If the bank hints that it could still hike UK interest rates in 2018 and expresses confidence that Britain’s economy will be resilient, the Pound to Swiss Franc exchange rate could see some late-week recovery.
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TAGS: Pound Swiss Franc Forecasts