USD/CHF rises as US Dollar holds firm during shutdown, SNB rate cut speculation grows

• The US Dollar remains strong despite the ongoing US government shutdown.
• Expectations of further rate cuts by the Fed are likely to limit the upside potential of the Greenback.
• Weakening labor market and disinflation in Switzerland fuel speculation of a possible return to negative interest rates by the SNB.

USD/CHF pair strengthens on Wednesday, up 0.30% for the day to 0.8010 at the time of writing, its highest level for a month, as the US Dollar (USD) maintains a firm tone despite the prolonged US government shutdown.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, rises by 0.2% to around 98.85 at the time of writing, after hitting its highest level in two months earlier on Wednesday at 98.99.

The US Dollar's resilience is partly driven by safe-haven flows amid political uncertainty, as well as recent international developments. In Japan, the election of Sanae Takaichi as the new leader of the conservative party has reinforced expectations that the Bank of Japan (BoJ) will maintain its accommodative stance. Meanwhile, in France, the sudden resignation of Prime Minister Sebastien Lecornu has added to Europe's political worries.

In Washington, the government shutdown enters its second week with little progress in the Senate. Political tensions have intensified after President Donald Trump announced potential cuts to welfare programs and layoffs in federal agencies. According to a Polymarket poll, the odds of a deal being reached this week stand at only 23%. The prolonged political stalemate is likely to weigh on economic confidence and could influence the Federal Reserve's (Fed) next monetary policy decisions in October.

Markets continue to expect further easing by the Fed. According to the CME FedWatch tool, there is a 95% chance of a 25-basis-point rate cut in October and over an 80% chance of another reduction in December. The release of the Federal Open Market Committee (FOMC) Minutes from the September meeting, due later on Wednesday, may offer more insight into policymakers' diverging views. Fed's Neel Kashkari warns against lowering rates too fast, while Fed Governor Stephen Miran argues for additional easing to support growth.

In Switzerland, the deterioration in labor market conditions and the moderation of inflation have raised speculation that the Swiss National Bank (SNB) could reintroduce negative interest rates. The Unemployment Rate increased to 3% in September from 2.9% in August, while the Consumer Price Index (CPI) fell by 0.2% MoM. These developments suggest that the SNB may adopt a more accommodative stance in the months ahead, weighing down on the Swiss Franc (CHF).