USD/CHF stays below 0.8500, traders adopt caution due to looming US inflation

• USD/CHF loses ground as market caution emerges due to looming US CPI data.
• The improved US Treasury yields provide support to limit the downside of the US Dollar.
• The latest Swiss Foreign Currency Reserves indicates continuing intervention by the Swiss National Bank to support the Swiss Franc.

USD/CHF inches lower to near 0.8480 during the European hours on Tuesday. This downside could be attributed to the US Dollar (USD) paring its intraday gains, possibly driven by improved risk sentiment. However, the improved US Treasury yields provide support to limit the downside of the Greenback.

The US Dollar Index (DXY), which measures the value of the US Dollar against six other major currencies, holds minor gains for the third successive day, trading around 101.70 with 2-year and 10-year yields on US Treasury bonds standing at 3.69% and 3.72%, respectively, at the time of writing.

Additionally, the US Dollar received support as the recent US labor market report raised uncertainty over the likelihood of an aggressive interest rate cut by the Federal Reserve (Fed) at its September meeting.

According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has slightly decreased to 29.0%, down from 30.0% a week ago.

In Switzerland, traders are expected to closely monitor any speeches from Swiss National Bank (SNB) members this week, as there are no major economic releases scheduled. Recently, Swiss inflation fell to a five-month low, increasing speculation about the possibility of another rate cut by the SNB in the near future.

Last week, the Swiss National Bank's (SNB) Foreign Currency Reserves fell to CHF 694 billion in August, down from CHF 704 billion in July. This marks the fourth consecutive decline, suggesting continued intervention by the Swiss National Bank (SNB) in currency markets to support the Swiss Franc (CHF).