Swiss Franc weakens as safe-haven demand lifts US Dollar

USD/CHF gains ground after two days of losses, trading around 0.8310 during Asian hours on Monday. The pair is currently appreciating due to a strengthening US Dollar (USD) amid rising safe-haven demand, which could be attributed to deteriorating geopolitical conditions in the Middle East.

Saudi-backed forces in Yemen launched a major offensive to reclaim territory from Houthi forces. Tensions escalated sharply after the Iran-aligned group seized control of the Bab el-Mandeb strait, a crucial maritime chokepoint between the Red Sea and the Gulf of Aden that provides a vital bypass route for regional crude exports avoiding the Strait of Hormuz.

Following softer-than-expected US employment figures, financial markets are now pricing in nearly a 77.9% chance that the Fed will keep benchmark interest rates steady at its upcoming policy meeting—up from 74% before the labor report. This shift reflects growing sentiment that a cooling job market will prompt policymakers to hold rates baseline.

This repricing in rate expectations follows a disappointing US labor market performance in September, when Nonfarm Payrolls expanded by only 29,000 positions. This figure fell well short of Wall Street estimates targeting 90,000 additions and marked a steep slowdown from August’s revised figure of 133,000. Further signaling labor slack, the US unemployment rate rose slightly to 4.2%, even as the labor force participation rate edged upward to 61.8%.

Fed path seen shifting to later, more gradual hikes

According to TD Securities, the expected timing of further Fed tightening has shifted, with economists now looking for rate increases in December and March rather than October and January. They describe this as "a more gradual hiking cycle than our original expectation," and stress that "we still expect a total of 75bp of hikes." The bank notes that "we do not believe that Friday's jobs report changed much for the outlook," but argues that "last week's Fedspeak has made it clear that the FOMC is looking for caution — potentially due to the recent sell-off in rates," reinforcing the case for a slower, later move higher in policy rates.

However, further upside for the USD/CHF pair could be restrained by concurrent strength in the Swiss Franc (CHF). The Franc continues to draw support from safe-haven demand, driven by growing concerns over debt affordability among its European peers. Additionally, elevated energy prices are underpinning worries around government debt and expenditures across Europe, leading risk-averse investors to seek shelter in the Swiss currency during this period of heightened volatility.

Franc support seen resilient despite potential near-term consolidation

Commerzbank’s Michael Pfister acknowledges that the recent strengthening of the Swiss Franc may not be entirely one-way, cautioning that “there could well be periods of stabilisation in the coming weeks, which might put the franc under pressure again.” Nonetheless, he frames any such consolidation as temporary, set against a broader backdrop in which rising global bond yields and mounting government debt concerns continue to underpin the Franc’s appeal over the Euro, supported by Switzerland’s debt brake and comparatively sound public finances.