EUR/CHF Continues Below Parity

EUR/CHF Below Parity 

Last week the euro exchange rate went down drastically, especially versus CHF. EUR/CHF hit the level below parity, of 0.9780, for the first time since 2015, when the currency peg was scrapped by the Swiss National Bank. The currency pair tested below parity point earlier this year, but it quickly recovered back then. This time it looks the below parity exchange rate will stay longer, as the euro is generally sinking – EUR/USD exchange rate decreased 11% year to date. Given the ongoing conflict in Ukraine, ever rising inflation and not very optimistic outlook on eurozone economy, the situation of euro will remain to be difficult, thus the outlook is that CHF will continue to strengthen.

ECB’s Policy

The very low euro exchange rate is a result of few factors, one of them is the European Central Bank’s policy. For much of the first half of the year, the euro exchange rate was influenced by the divergence between monetary policy of the ECB and FED or other central banks from G10 countries, that showcased more brave attitude. The ECB was battling the crisis resulted from the Ukraine war, as well as difficult economic situation and thus thought it was too fragile to propose any tightening of the policy. The ECB in H1 was reaffirming its commitment to easing policy in the market. However, there has been a shift in policy as of recently. The ECB can no longer ignore spiraling inflation, as prices are soaring in the eurozone. That is why the ECB made this month a first hike rate in over a decade. Initially the bank signaled a 25bps hike in July with a larger hike in September, but now the bank turned more decisive and larger hike is anticipated already in July.

SNB’s Rate Hike

Not only the ECB’s move came as a surprise for analysts and investors. Another huge shock was the interest rate hike announced by the SNB in July. For the first time in years rates were increased by 50bps, form the record low level of minus 0.75. The move was a response to the quickly growing Swiss inflation. More hikes are expected this year as the SNB continue to fight inflation. What is also worth to notice, upon announcing the hike rates, the SNB refrained from giving the common comments of the strength of Swiss franc. Which can mean the bank already got used to the good exchange rate of the CHF and don’t plan to fight its appreciation now, as it helps curb the inflation.