USD/CHF: Diverging Monetary Policies and Strategic Trade Opportunities

The USD/CHF currency pair is poised for strategic short-term trading opportunities, driven by diverging monetary policies of the US Federal Reserve and the Swiss National Bank. While the Fed maintains high interest rates to cool down the economy, the SNB has begun rate cuts to stimulate growth. This interest rate differential, coupled with recent market movements, suggests a potential rally in USD/CHF. Keep an eye on the technical levels and be prepared for a possible Fed rate cut in September 2024, which could further influence this dynamic trade.

Market Analyst
Jul 8, 2024

The USD/CHF currency pair presents an interesting scenario as the US Federal Reserve and the Swiss National Bank (SNB) diverge in their monetary policies. The Fed has maintained its high interest rate to continue cooling down the economy, while the SNB has started reducing its rate, indicating a shift to stimulate their economy. This difference in interest rate policies creates an opportunity for a short-term trade in USD/CHF, particularly as the market anticipates a potential Fed rate cut in September 2024, contingent on reaching the US inflation target.

Interest Rate Dynamics: The first chart highlights the contrasting paths of interest rates set by the US Federal Reserve and the Swiss National Bank from April 2022 to July 2024. The Fed’s interest rate has steadily increased, peaking around 5%, while the SNB’s rate, after a modest rise, has begun to decrease. This divergence underscores the different stages of economic cycles each country is navigating – the US is still aiming to cool down inflation, whereas Switzerland is moving to stimulate economic growth.

Technical Analysis: The second chart shows the USD/CHF price movements. We’ve seen a significant rally in June and July, followed by a correction phase. Currently, the pair is experiencing a pullback, with the potential to retrace further towards the 61.8% Fibonacci level at approximately 0.89122. This level aligns with typical corrective waves in a zigzag pattern.

Short-Term Trade Setup:

  • Wave C Projection: Based on the chart pattern, there’s a possibility of another upward move into Wave C within this zigzag structure.
  • Retracement Potential: The current correction could see prices dipping to the 61.8% retracement region. The key invalidation level for this setup sits at the lows of 0.88268. A break below this level would invalidate the bullish outlook.
  • Anticipated Move: If the correction holds above the invalidation level, we could see USD/CHF rallying again, providing a short-term trade opportunity.

Summary: With the Fed potentially cutting rates in September 2024, provided inflation targets are met, and the SNB already in a rate-cutting phase, the interest rate differentials favor USD/CHF bulls in the short term. The recent correction offers a potential entry point, with a target set for the completion of Wave C in the zigzag pattern.

Keep an eye on the 61.8% Fibonacci level for possible support and use the 0.88268 level as a stop-loss to manage risk. This trade setup hinges on the ongoing economic strategies of both the US and Switzerland, making it essential to stay updated on any policy changes or economic data releases.

Disclaimer: For educational purposes only. Trading comes with substantial risk, leading to possible loss of your capital. Traders are advised to do their own due diligence before investing.