Pound-to-Franc Selloff Gains Traction: Soc Gen
- Written by: Gary Howes
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GBP/CHF could remain under pressure near term as investors respond to diverging fundamentals, a cooling UK economy and a franc buoyed by trade optimism and limited SNB resistance.
The pound is now below 1.06 against the Swiss franc on Tuesday, with analysts at Société Générale saying the move could extend as weaker UK employment data and improving Swiss fundamentals tilt the balance in favour of the franc.
Société Générale said "short GBP/CHF gains traction below 1.06... and could have room to run" following a rise in the UK unemployment rate to 5.0% in September.
The deterioration came at least a month earlier than the Bank of England had forecast and follows two consecutive months of deterioration after stability between May and July.
The decline in employment of 22,000 was the first since March 2024, while private sector wage growth slowed to 4.2% year-on-year. Société Générale described the moderation in wage growth as "another step in the right direction for the MPC and the hawks who worry about second-round inflation effects."
Money market pricing shows a December reduction in Bank Rate is nailed at 80% odds.
Above: GBP/CHF at daily intervals.
The labour report triggered a sharp drop in gilt yields, with two- and ten-year bonds opening lower and the curve steepening to 67 basis points.
Société Générale noted that the ten-year gilt yield, which has previously held firm around 4.40%, could now "breach and open up 4.36%" if next week’s inflation data undershoots expectations.
Monetary policy commentary added to the dovish tone. MPC member Megan Greene said it was possible the labour market "is past the worst” and described market estimates of the neutral rate at 3.25% to 3.50% as "reasonable."
🇨🇭Meanwhile, the Swiss franc drew strength from reports that Switzerland is close to securing a reduction in US tariffs from 39% to 15%.
Société Générale said the move “would diminish export and growth headwinds and by extension could make it harder for the SNB to reduce the appeal of the franc.”
The bank noted that the franc is currently the best performer in the G10, as easing trade pressure combines with steady domestic fundamentals to sustain demand for the currency.
Société Générale added that "paying interest of topside strikes in EUR/CHF stalls at –0.67 after the decent run up in the premium of EUR calls/CHF puts from –1.0 since the back end of October," indicating reduced hedging demand for a weaker franc.