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The present situation catch up is that Switzerland is squaring off against deflationary pressures once again. While not quite yet reaching deflation territory, the worries are mounting as inflation pressures have fallen off dramatically in the second half of last year. Core prices are still hanging in there but it feels like only a matter of time before the issue becomes bigger than it is now.And for the SNB, the central bank just does not want to fall back into the rabbit hole of having to start using unconventional monetary policy measures once again. When that sticks, we’ve seen before how difficult it can be to get out of the rut. The Covid pandemic gave them a get out of jail free card but that has now expired as the deflation era looks set to return.To compound matters for the Swiss central bank, a stronger franc currency is making the situation even more difficult. That just adds to the deflationary impact and puts the SNB in a tough spot in trying to avoid a return to negative interest rates.The EUR/CHF is one that is less talked about in the past weeks but is one that is worth taking note of:The SNB looked to have drawn a line previously when the currency pair hit the 0.92 level but that has given way in late January. And we’re seeing the franc continue to nudge higher still with the pair inching towards 0.91 now.The big question is where does the SNB draw the line next in terms of intervening to limit the franc strength? And how much are they willing to go up against market sentiment?As such, escalating US-Iran tensions are coming at an unfortunate timing for the central bank. Amid the de-dollarisation narrative and the yen facing its own set of problems back home, the franc is the only game in town for currency traders seeking safe haven.And that will just put more downside pressure on EUR/CHF, which is already at record lows this week. That in turn will just add more woes to the SNB in trying to manage their inflation mandate. And eventually, having to possibly look to negative rates to also deter further strength in the franc currency alongside dealing with deflation pressures.
This article was written by Justin Low at investinglive.com.
💡 DMK Insight
Switzerland’s struggle with deflationary pressures is a critical watchpoint for traders, especially as inflation rates have sharply declined. This situation could lead to a shift in monetary policy from the Swiss National Bank (SNB), which has been relatively hawkish in recent times. If deflation becomes a more pressing issue, the SNB might pivot to a more dovish stance, impacting the Swiss franc (CHF) and related forex pairs. Traders should keep an eye on core price movements and any statements from the SNB regarding their inflation outlook, as these could signal potential shifts in interest rates. Moreover, the broader implications of Switzerland’s economic health could ripple through European markets, particularly affecting the euro (EUR/CHF) and other regional currencies. If the SNB decides to act, we could see increased volatility in these pairs. Watch for any economic data releases that might indicate a trend toward deflation, as well as key technical levels in the CHF pairs that could signal entry or exit points. The next few weeks could be pivotal, so staying informed is essential.
📮 Takeaway
Monitor Switzerland’s inflation data closely; a shift towards deflation could prompt the SNB to change its monetary policy, impacting the CHF significantly.
