USD/CHF hits three-week high on inflation miss, US Dollar strength

• The Swiss Franc weakens after lower-than-expected inflation data.
• Disinflationary pressures increase expectations of a Swiss National Bank rate cut.
• The US Dollar remains supported despite a contraction in US manufacturing activity.

USD/CHF edges higher on Monday, trading around 0.8070 at the time of writing, up 0.35% on the day after hitting a three-week high earlier. The Swiss Franc's (CHF) weakness, following softer consumer inflation figures, is providing additional support for the US Dollar (USD) bullish momentum.

According to the Swiss Federal Statistical Office, the Consumer Price Index (CPI) fell by 0.3% MoM in October, steeper than the 0.1% decline expected and following a 0.2% drop in September. On a yearly basis, prices rose only 0.1%, down from 0.2% in September and below forecasts of 0.3%. The data confirms that inflation remains near the lower bound of the Swiss National Bank (SNB) target range of 0% to 2%, fueling speculation that the central bank may consider a return to negative interest rates.

Money markets now assign a 70% chance of a 25-basis-point rate cut to -0.25% within the next twelve months, up from 50% previously, according to the latest BHH MarketView report. While SNB President Martin Schlegel maintains a cautious approach, Governing Board member Petra Tschudin recently stated that the central bank remains ready to reintroduce negative rates if economic conditions deteriorate further.

Beyond domestic factors, the US Dollar continues to find support in monetary policy divergence after the recent Federal Reserve (Fed) rate cut, as Chair Jerome Powell warned that an additional move in December is "far from a done deal." This relative advantage in interest rate expectations underpins the Greenback.

On the US front, the Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) fell to 48.7 in October from 49.1 in September, marking the eighth consecutive month of contraction and signaling further industrial slowdown. However, the Prices Paid sub-index rose to 58, suggesting that inflationary pressures persist in some sectors. Meanwhile, the S&P Global Manufacturing PMI improved to 52.5, indicating continued expansion.

Overall, despite soft US factory data, the interest rate differential and weaker Swiss inflation continue to favor the US Dollar over the Franc, keeping USD/CHF comfortably above the 0.8050 level.