USD/CHF corrects to near 0.8940 as USD Index struggles to extend recovery, Fed policy eyed

• USD/CHF has slipped marginally to near 0.8940, however, the upside seems favored ahead of Fed policy.
• Persistent US core inflation supports the continuation of the policy-tightening spell by the Fed.
• US labor market conditions are still tight as firms are offering higher wages for recruiting fresh talent.

The USD/CHF pair has corrected gradually after failing to sustain above the immediate resistance of 0.8950 in the Tokyo session. The Swiss franc asset is expected to resume its upside journey as the appeal for the US Dollar Index (DXY) is improving ahead of the release of the Federal Reserve’s (Fed) monetary policy.

S&P500 futures are adding more gains in Asia after recovering losses, portraying a risk appetite theme in which declines are heavily bought by market participants. A recovery in the USD index is also supporting US Treasury yields. The return on 10-year US Treasury bonds has rebounded above 3.45%.

The USD Index is struggling in extending its recovery above 101.80, however, the upside seems favored as the pre-Fed anxiety is expected to kick in. One more interest rate hike announcement from Fed chair Jerome Powell is in the pipeline as US consumer spending is resilient and Employment Cost Index is not showing stagnation.

Friday’s core Personal Consumption Expenditure (PCE) Price Index showed that the pace in consumer spending for goods and services excluding oil and food remained steady at 0.3%. The headline price index is consistently declining due to lower oil prices, however, the core inflation seems extremely persistent, which supports the continuation of the policy-tightening spell by the Fed.

Apart from that, US Labor Cost Index (Q1) climbed to 1.2% from the consensus of 1.1%. It indicates that labor market conditions are still tight as firms are offering higher wages for recruiting fresh talent.

On the Swiss Franc front, weak Real Retail Sales data has trimmed fears of inflation in the Swiss economy. On Friday, the economic data contracted sharply by 1.9% while the street was anticipating an expansion by 1.7% on an annual basis. This would be a relief for the Swiss National Bank (SNB), which is struggling to tame stubborn inflation.

Investors should be aware that the Swiss economy will remain closed on Monday on account of Labor Day.