• SNB announces its decision at 08:30 GMT Thursday

• Markets pricing in 25% probability for a rate cut

• However, that’s unlikely to happen so soon

• Overall, outlook for Swiss franc remains positive

Swiss economy slows

The Swiss economy hit a road bump lately. Economic growth almost came to a standstill in the third quarter, printing just 0.3% from a year earlier as the manufacturing sector continued to struggle.

Similarly, inflation slowed sharply in November. The annual inflation rate fell to just 1.4%, some distance below the Swiss National Bank’s target of “less than 2%”. Hence, one could argue the SNB is the first major central to have won the war against inflation.

Against this backdrop, markets are pricing in a 25% probability of an immediate rate cut when the SNB meets on Thursday. For next year, traders anticipate almost three rate cuts in total, which is much less than what the Fed and the European Central Bank are expected to deliver.

Is a rate cut realistic? 

Admittedly, it seems highly unlikely that the SNB will cut rates so soon. The latest commentary from SNB Chairman Jordan in mid-November included a warning that rates can still be raised further, so it would be a dramatic reversal to abandon that stance and cut rates immediately.

It would make more sense for the SNB to keep rates steady, but drop its tightening bias and shift to a neutral stance instead, putting the emphasis on incoming data to guide its future decisions. That was also the playbook adopted by the European Central Bank, which is usually the SNB’s role model in terms of strategy.

The question is, would such a shift be enough to hurt the Swiss franc? Markets are already pricing in rate cuts in 2024, so a neutral shift at this stage would not be much of a surprise for traders.

In fact, with the market pricing in a 25% probability for an immediate rate cut, the initial reaction in the Swiss franc will likely be positive if the SNB ultimately keeps rates unchanged. Looking at the euro/franc chart, the 0.9400 region could provide support to any declines, while on the upside, the first major resistance barrier might be around 0.9620.

What does 2024 hold for the franc? 

In the big picture, the Swiss franc is the best performing major currency of this year, hitting an eight-year high against the euro and a record high against the Japanese yen lately. The SNB’s long-awaited exit from negative interest rates and its FX interventions to prop up the franc this year in order to fight inflation were major factors, alongside the nation’s classic current account surplus.

Looking into next year, this stellar performance could continue. Even though the SNB probably won’t be so active in the FX market now that inflation has cooled, there might be other positive developments for the franc. For instance, foreign central banks like the Fed and ECB will likely cut rates faster and deeper than the SNB will.

Finally, the franc could also benefit from a slowing global economy, thanks to its safe-haven status. The unfolding economic weakness in Europe and China coupled with the uncertainty surrounding the US presidential election could be a combination that keeps the franc supported, as nervous investors search for shelter.