The Swiss Franc weakened markedly in response to October’s Producer and Import Price Index data. Inflationary pressure was found to have fallen short of forecasts on both the month and the year, something which does not appear to bode well for the domestic economy. As domestic interest rates remain far in negative territory the continued lack of inflationary pressure looks to be causing some concern for policymakers. Nevertheless, this disappointing showing prompted the GBP CHF exchange rate to strengthen.
Confidence in the Pound proved short-lived, though, as the latest UK Consumer Price Index report showed an unexpected weakening, in spite of a sharp jump in producer prices. With inflationary pressure not feeding through in the wider economy just yet there is less incentive for the Bank of England (BoE) to consider returning to a monetary tightening cycle. Given that policymakers have expressed a willingness to allow some overshoot of the 2% inflation target it seems likely that interest rates will remain low for longer, something that has not encouraged demand for Sterling.
GBP CHF Exchange Rate Rallied on Dovish SNB Comments
Further pressure was put on the Franc on Wednesday by comments from Swiss National Bank (SNB) Vice Chair Fritz Zurbruegg. The policymaker reiterated the SNB’s readiness to intervene in foreign exchange markets in order to deal with the overvaluation of the Franc, an indication that naturally spooked investors. This helped to boost the GBP CHF exchange rate, particularly as gold prices faltered somewhat.
UK employment data proved rather mixed, meanwhile, with the ILO unemployment rate showing a surprise fall in the three months to September while jobless claims rose sharply in October. Although this put the strength of the domestic labour market under question the Pound nevertheless trended higher on the back of the report. In large part this was thanks to stable wage growth, which helped to ease investor concerns over an impending squeeze on real earnings.
Safe-Haven Demand Forecast to Boost Franc Strength
A rising sense of global political risk could continue to benefit the Franc for the foreseeable future, particularly in advance of the Italian constitutional referendum. With the ultimate shape of the Donald Trump presidency still unclear markets are likely to remain in a relatively jittery mood, to the benefit of the safe-haven Franc. If the divisive nature of the President Elect comes back into focus, or his economic policies prove more discouraging, then the GBP CHF exchange rate is likely to slump.
Sterling could find a more substantial rallying point on Thursday’s UK retail sales data, which is predicted to show an uptick in consumer demand. Sales are expected to have risen 5.4% on the year in October, a sign of resilient consumer sentiment which could go some way to easing worries over the negative impact of the Brexit vote. However, if confidence appears to have faltered then the Pound is likely to return to a generally weaker footing.
Sentiment towards the Pound is also expected to turn a little more bearish ahead of the Autumn Statement from Chancellor of the Exchequer Philip Hammond. Given the relatively high level of public sector borrowing seen in recent months it seems likely that Hammond will not have the wiggle room to deliver as much fiscal stimulus as previously hoped. Should the budget be deemed disappointing by markets then the GBP CHF exchange rate can be expected to trend lower.