January 20 (Reuters) – The SNB intervention designed to support EUR/CHF and the subsequent rebalancing of the proceeds of this intervention appears to be dominating EUR/USD, forcing the pair into a tight range and suppressing volatility.
Since the Swiss National Bank reportedly resumed its interventions at the end of November, the sharp decline in EUR/USD has come to a halt, with volatility collapsing and EUR/USD mostly confined to 1.12-1.14 and never outside of 1.1186-1.1483.
A calm and predictable currency is generally welcomed by central banks, but perhaps not if the currency is needed to support monetary policy or if its level goes against monetary policy, which can become the case with the euro.
Inflation, which the European Central Bank deems transitory, has hit an all-time high and with rising oil and factory prices in Germany soaring well beyond expectations in December, pressure on ECB expectations will to augment.
Where EUR/USD could rise in anticipation of rate hikes suppressing inflation and possibly allowing the ECB to delay hikes, SNB policy could instead trap EUR/USD relatively low, fueling inflation and forcing the ECB to raise rates earlier and stifling the euro zone economy.
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(Jeremy Boulton is a market analyst at Reuters. Opinions expressed are his own)
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