GBP CHF Vulnerable to Rising Geopolitical Tensions

The GBP CHF exchange rate was shored up by a weakening of the Swiss inflation rate, which dipped from 0.5% to 0.2% in March. This softening dented the appeal of the Franc, offering little encouragement to the Swiss National Bank (SNB) as it continues to grapple with its ultra-loose monetary policy. As the underlying strength of the Franc has contributed to this domestic weakness investors sold out of the currency, jittery over the prospect of renewed SNB intervention.

In the wake of weaker UK manufacturing and construction PMIs markets were happy to see that the domestic service sector had continued to growth strongly in March. As the service sector is the country’s main economic engine this positive result helped to ease some of the worries surrounding Sterling. Even so, the details of the report suggested that inflationary pressure is continuing to mount as the impact of the Brexit vote and consequent weakening of the Pound continues to filter through.

Falling Swiss Unemployment Dented GBP CHF

Confidence in the Pound weakened once again, however, as Friday’s raft of UK figures proved disappointing. Markets were particularly discouraged by a downwards revision in the NIESR gross domestic product estimate for the first quarter, which was lowered to 0.5%. With domestic manufacturing and construction output having contracted on the month this naturally raised concerns over the outlook of the UK economy. A Brexit-based uncertainty is only likely to create a greater drag on growth over the coming months the GBP CHF exchange rate was prompted to slump.

As the Swiss unemployment rate fall from 3.6% to 3.4%, in line with forecasts, the Franc was encouraged to maintain a stronger footing ahead of the weekend. This latest signs of robustness within the domestic economy encouraged investors to favour the Franc, particularly as the day’s US data undermined the appeal of the US Dollar. With global geopolitical tensions mounting over Syria demand for the safe-haven Swiss Franc increased further.

Safe-Haven Demand Could Keep Franc on Stronger Footing

Sterling volatility is expected with the release of March’s UK consumer price index report. Investors are looking to see signs that inflationary pressure is continuing to mount within the economy, increasing the pressure on the Bank of England (BoE) to consider an interest rate hike. However, forecasts point towards a mild slowing in inflation on the month. With the BoE having already pledged to look through some degree of post-referendum inflation any moderation is likely to extend the central bank’s neutral outlook.

With Swiss data rather limited in the coming week the Franc is likely to remain closely tied to wider market developments. If the rhetoric of the US and Russia continues to harden then risk appetite looks set to diminish further, offering support to the Franc. Signs of stronger growth in the Eurozone could also boost CHF exchange rates, with the SNB hoping to see signs that the European Central Bank (ECB) could begin to tighten monetary policy once again in the near future.

Louisa Heath

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