GBP CHF Under Pressure After Stronger Swiss Inflation Data

Swiss inflation surprised to the upside in May, offering fresh support to the Franc. Inflationary pressure rose unexpectedly to 0.5% on the year, defying forecasts of a modest weakening. While this is still a long way from the Swiss National Bank’s (SNB) preferred range, this improvement nevertheless gave investors cause for confidence. Building inflationary pressure within the Swiss economy is likely to diminish the chances of the SNB pursuing looser monetary policy in the near term, potential raising the odds of an interest rate hike coming in the future.

However, as the European Central Bank (ECB) shifted away from its dovish bias at its latest policy meeting the Franc struggled to capitalise on this positive data. With the policy divergence between the ECB and SNB looking set to increase the appeal of the Franc naturally softened.

Confidence in the Pound, meanwhile, remained weak as the UK returned to the polls for the third time in as many years. Even though the opinion polls have narrowed dramatically since Theresa May unexpectedly called the election investors are still anticipating an increased Conservative majority. However, as markets are still cautious of placing too much faith in the accuracy of pollsters a sense of nervousness kept Sterling in a bearish mood. The threat of a hung parliament remains, however slim, leaving the GBP CHF exchange rate open to further downside pressure.

GBP CHF Volatility Expected on UK Election Results

Once the polls close and constituencies start to declare their results the Pound is likely to see a renewed bout of volatility. If signs point towards the Conservatives having increased their majority the GBP CHF exchange rate could return to an uptrend, regaining some of the ground it has lost in the last month. Even so, if Theresa May’s gamble fails to yield solid gains the appeal of Sterling could remain muted. So long as Brexiteer backbenchers hold onto the power to put pressure on the Prime Minister, increasing the chances of an acrimonious divorce from the EU, any Pound rally may prove limited.

On the other hand, if the election yields a hung parliament or even a Labour majority the Pound is likely to slump sharply across the board. Any increased sense of political uncertainty could dent demand for Sterling further, boding ill for the imminent start of Brexit negotiations. Even so, with Labour likely to push for a softer form of Brexit such a result could still prove positive for the GBP CHF exchange rate in the longer term.

The appeal of the Franc could weaken ahead of the SNB interest rate decision next week. While markets do not anticipate any change in monetary policy at this juncture focus will fall on the latest Financial Stability Report. If policymakers sound a more optimistic tone with regards to the domestic economy this could encourage investors to pile into the Franc, even if the prospect of tighter monetary policy remains a distant prospect. On the other hand, any indications that the SNB remains of a dovish mind-set could give the GBP CHF exchange rate a fresh rallying point.

Louisa Heath

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