Swiss Franc strengthens as US Dollar loses momentum following US PCE inflation data

USD/CHF edges lower on Friday, retracing all the gains recorded this week as the US Dollar (USD) rally loses momentum following the latest US Personal Consumption Expenditures (PCE) data, which broadly came in line with expectations and showed that underlying inflationary pressures remain relatively contained.

At the time of writing, the pair trades around 0.8071, extending losses for a second consecutive day after hitting an 11-month high of 0.8139 on Wednesday.

Data released on Thursday showed the headline PCE rose 0.4% MoM in May, unchanged from April but below the 0.5% forecast. Core PCE held steady at 0.3%, matching expectations.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trades around 101.12 after hitting a more than one-year high near 101.80 earlier this week.

The data helped temper expectations of an imminent Federal Reserve (Fed) interest rate hike. However, with annual inflation still running well above the central bank's 2% target, traders continue to expect interest rates to remain unchanged in the coming months while leaving the door open to a rate hike later this year.

On Thursday, Chicago Fed President Austan Goolsbee said core inflation is "still well too high" and is "trending the wrong way." New York Fed President John Williams said it remains imperative for the Fed to bring inflation back to its 2% target.

A Reuters poll released on Friday showed that 78 of 102 economists expect the Fed to keep interest rates unchanged at  3.50-3.75% through the end of 2026.

On the Swiss side, the Swiss National Bank (SNB) continues to maintain a steady monetary policy stance, keeping its policy rate at 0% as inflation remains near the lower end of the central bank's 0-2% price stability range.

The International Monetary Fund (IMF) said on Thursday, "The monetary policy stance is appropriate, but high uncertainty warrants maintaining flexibility to adjust policy rates in either direction."

"Under a stagflation scenario triggered by a sharp and sustained rise in energy prices, higher interest rates might be necessary." It added that in "a severely disinflationary demand shock," "negative interest rates, despite possible financial system distortions, are the strongest of the SNB's policy options," the IMF added.