EUR/CHF reverses lower from highs post-SNB, ECB meetings, eyes test of 1.0400 level

• EUR/CHF has reversed sharply back from earlier session highs in the 1.0460s and now trades in the 1.0410s.
• The pair may be moving lower amid focus on Swiss/Eurozone inflation differentials in wake of ECB and SNB policy announcements.

EUR/CHF has reversed back from earlier session highs in the 1.0460s and current trades at session lows in the 1.0410s, with the bears eyeing an imminent test of the psychologically important 1.0400 level. Its been an unusually choppy session for the pair given that both the Swiss National Bank and European Central Bank both announced monetary policy decision on the session.

Initially, the SNB meeting appeared to weigh on the Swiss franc, though in wake of the ECB meeting, this weakness reversed and CHF is now the best performing G10 currency on the day. For reference, interest rates were held as expected at -0.75% and Governor Thomas Jordan pledged that rates will remain there given comparatively modest inflationary pressures in Switzerland versus most other developed nations. The characterisation of CHF was maintained at “highly valued” and the SNB pledged to continue FX interventions where necessary

In terms of the ECB meeting; the bank confirmed as expected the end of the PEPP by the end of Q1 2022 and announced that, in order to avoid a cliff-edge drop off in bond purchases, the APP would be upped to EUR 40B in Q2 and EUR 30B in Q3 and then at a pace of EUR 20B indefinitely afterward. The ECB’s inflation forecast for 2022 was substantially upgraded (to 3.2% from 1.7%) but ECB President Christine Lagarde was keen to emphasise that a hike in 2022 was very unlikely. Why this weighed on EUR/CHF at the time was not quite clear, with some suggesting the upgrade to Eurozone inflation highlighted Eurozone/Swiss inflation differentials.

Indeed, inflation differentials between the Eurozone and Switzerland have seen EUR/CHF fall in recent months (i.e. as the value of the euro is eroded faster than the value of the Swiss franc), a phenomenon the SNB made a nod to in order to justify why they have let the pair fall so much since its pre-pandemic levels above 1.10. ING noted that “there seems to be a clear desire to justify why the SNB is allowing the franc to strengthen as much as it is now and to reinforce its credibility that it will continue to act” before adding that “the comment about the risk of negative inflation if the franc were to strengthen too much is for me a real signal about its intentions to act in the coming months.” That implies EUR/CHF’s ride lower from here might not be quite as easy.