• USD/CHF loses ground as the Fed is expected to lower interest rates in early 2024.
• The demand for the Swiss Franc is heightened on risk aversion due to the Middle-East conflict.
• CME Fedwatch tool indicated that markets are pricing in the probability of a Fed rate cut in March and in May.

USD/CHF posted an all-time low at 0.8394 during the Asian trading hours on Thursday, trading around 0.8400 at the time of writing. The USD/CHF faces challenges due to the weaker US Dollar (USD). The escalated geopolitical situation in the Middle East is fostering risk aversion, leading to an increase in demand for the safe-haven Swiss Franc (CHF).

Investors seek refuge in assets like the CHF during times of heightened geopolitical tensions. Concerns are particularly centered around the potential closure of the Gibraltar Strait by Iran, adding to the geopolitical uncertainties. However, major shipping firms have begun to return to the Red Sea, indicating a tentative normalization in the region.

According to the CME Fedwatch tool, markets are pricing in a probability of more than 88% for a rate cut in March and a full pricing in of a rate cut in May. These figures indicate the prevailing expectations among investors for potential monetary policy easing by the Federal Reserve (Fed).

Additionally, the softer US Core Personal Consumption Expenditures (PCE) – inflation further reinforces the belief that the Federal Reserve may contemplate easing its monetary stance to address economic conditions. On Wednesday, the US Richmond Fed Manufacturing Index experienced a notable decrease of 11 points in December, contrary to the expected decrease of 7 points and a 5-point decrease in November.

Investors are anticipated to focus on Thursday's releases of Initial Jobless Claims and Pending Home Sales from the United States, which could offer additional insights into the labor market and the real estate sector, respectively.