USD/CHF drops below 0.8450 as US Dollar struggles ahead of inflation data

• USD/CHF weakens as the US Dollar retreats, likely driven by a technical correction.
• US headline CPI is expected to recover to 0.3% MoM in April, from -0.1%.
• Easing trade tensions have dampened the demand for the safe-haven Swiss Franc.

USD/CHF retreats after posting more than 2% gains in the previous session, trading around 0.8430 during the Asian hours on Tuesday. The pullback comes as the US Dollar (USD) softens, possibly due to a technical correction.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is trading lower near 101.50 at the time of writing. Investors are now turning their focus to the upcoming US Consumer Price Index (CPI) report for April, due later on the day. Analysts expect headline CPI to rebound to 0.3% month-over-month from -0.1%, while core CPI is also forecast to rise to 0.3% from 0.1%. Year-over-year figures for both metrics are anticipated to remain unchanged.

The earlier surge in the USD/CHF pair was driven by positive developments in US-China trade talks. Over the weekend, the two nations reached a preliminary agreement in Switzerland aimed at significantly reducing tariffs--a move seen as a potential step toward easing trade tensions. Under the agreement, the US will reduce tariffs on Chinese goods from 145% to 30%, while China will cut tariffs on US imports from 125% to 10%. The deal has boosted market sentiment and is viewed as a step toward stabilizing global trade relations.

The easing of trade tensions has encouraged a shift toward riskier assets, weighing on the safe-haven Swiss Franc (CHF). Moreover, the yield on the 10-year Swiss government bond climbed to near 0.37%, in line with a global rise in borrowing costs as investor risk appetite improved.

However, gains in Swiss yields were capped by rising expectations of further monetary easing by the Swiss National Bank (SNB). Last week, SNB Chairman Schlegel reiterated the bank's readiness to intervene in currency markets and cut interest rates--potentially into negative territory--if inflation continues to undershoot its target.