Switzerland started cutting interest rates three months earlier than the market had previously expected. The impact boosted USD/CHF and dragged down several other currencies.

The US dollar briefly weakened after the FOMC announcement in the early hours of this morning (21/March). Still, it immediately rebounded in the European session due to more dovish Swiss and UK central bank announcements. USD/CHF shot up the fastest among the major pairs. At the time of writing at the start of the New York session, USD/CHF had posted an intraday gain of over 1.25% and reached a record high since November 14, 2023, at 0.8980.

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The Swiss National Bank (SNB) decided to cut interest rates by 25 basis points from 1.75% to 1.50% in its policy meeting this afternoon. The reason was that "efforts to fight inflation over the past two and a half years have been effective". Swiss inflation has fallen below 2% for several months, and "the SNB considers it to be in the same range as price stability".

The SNB's decision surprised market participants, as most expected the SNB to start cutting interest rates as early as June. There was no speculation about the SNB being the first central bank to cut interest rates in this cycle.

More dovishly, the SNB expects inflation to continue in the sub-2% range for the next few years. This hints at the possibility of the SNB continuing its rate cuts in the coming months.

"The SNB cut rates 25bp today, against our expectations, and the CHF is likely to weaken on the back of this," says Dominic Bunning, a strategist at HSBC.

"The CHF has already been an underperformer this year and is now likely to extend this underperformance. Being the first G10 central bank to cut will undermine the currency from a carry perspective with the CHF likely to be increasingly seen as a funding currency of choice in a world of low FX volatility," says Bunning.

The SNB's decision also invites many to consider the possibility of some other central banks initiating rate cuts earlier than expected. Two of its neighboring currencies dived, Sterling and the Euro. In turn, the weakening market sentiment towards half of the major currencies lifted the US dollar rate, which the FOMC announcement had tripped up.

"The SNB is in a rush to cut... it's interesting now because we are entering a multi-speed exit from tightening phase of the cycle and central banks are starting to need to think for themselves again and take things in the direction that best suits their economy," says Neil Wilson, Chief Market Analyst at Finalto.