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USD/CHF Faces Downward Pressure Amid Dovish Federal Reserve Expectations

1 January 2024 Written by Anna Segal  Finance Industry Expert Anna Segal

The USD/CHF pair has continued its downward trend, inching closer to the 0.8400 level with a 0.40% loss. This movement is primarily driven by market expectations of a dovish shift in the Federal Reserve's monetary policy, alongside the influence of lower US yields. As 2023 concludes, the pair reflects a 9% depreciation for the year, marking its third consecutive week of losses.

Federal Reserve's Policy Outlook Influences Market Sentiment

In its final meeting of 2023, the Federal Reserve acknowledged slowing inflation and a cooling economic environment. This assessment led to projections of no interest rate hikes in 2024, with a forecast of a 75 basis points reduction according to the median terminal rate in the Summary of Economic Projections (SEP). Market expectations have grown even more dovish, with some traders speculating on rate cuts as early as the Fed's January meeting. This anticipation of an expedited easing cycle is contributing to the weakening of the US dollar.

US Treasury Yields Reflect Dovish Sentiments

The US Treasury yields present a mixed picture, with some rates slightly up but overall staying near multi-month lows. Notably, the 2-year rate is at 4.27%, while the 5-year and 10-year rates hover at 3.84% and 3.87%, respectively. The declining trend in yields, mirroring the dovish market outlook, has had a concurrent negative impact on the USD/CHF pair.

In the forthcoming week, key US labor market data will be in focus, including the Nonfarm Payrolls, Wage Inflation, and Unemployment Rate for December. These figures are of significant interest to the Federal Reserve and will likely influence market movements.

Technical Analysis: Bearish Momentum Prevails

The technical indicators on the USD/CHF daily chart suggest that selling pressure is currently dominant. The pair is trading below critical levels of the 20, 100, and 200-day Simple Moving Averages (SMAs), highlighting the bears' control in the market. The Relative Strength Index (RSI) indicates an oversold condition, which could hint at a potential reversal. However, the rising red bars in the Moving Average Convergence Divergence (MACD) underscore the continuing ascent of bearish momentum, presenting a hurdle for any bullish reversal.

Key Support and Resistance Levels

In the short term, the increasing bearish momentum suggested by the MACD may dampen prospects for a bullish reversal, despite the RSI's oversold signal. Therefore, the aggressive selling pressure, accentuated by the pair's position below the critical SMAs, continues to shape the short-term technical landscape. Support Levels to watch include 0.8400, 0.8350, and 0.8330, while Resistance Levels to monitor are 0.8500, 0.8530, and 0.8600.

Conclusion: A Complex Forex Outlook

As the USD/CHF navigates through these turbulent market conditions, influenced by dovish Fed expectations and mixed US Treasury yields, investors and traders are advised to closely monitor upcoming economic data and market sentiments. The pair's technical outlook remains predominantly bearish, reflecting the broader economic uncertainties and policy speculations heading into the new year.

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