• USD/CHF consolidates as Swiss Franc stabilizes post-UBS and Credit Suisse merger.
• Anticipation builds for Federal Reserve: 25 bps hike or pause.
• Adversity is likely to remain amid the unfolding banking crisis. 

USD/CHF has entered a consolidation phase this week, with the Swiss Franc finding some stability following the merger of UBS and Credit Suisse. After Credit Suisse defaulted amid a liquidity crunch, Swiss authorities intervened and facilitated the UBS takeover of the troubled bank.

Attention has now shifted to the upcoming Federal Reserve (Fed) policy decision on Wednesday. Investors are divided on whether the Fed will deliver a 25 basis point (bps) rate hike at the forthcoming FOMC meeting or not.

It is noteworthy that the Fed has recently opened its swap line to provide US Dollar liquidity to all central banks in need. Additionally, the Fed has been conducting instant lending operations through its discount window, resulting in a spike in the Fed's balance sheet despite ongoing Quantitative Tightening (QT).

These actions appear contradictory, raising rates while injecting liquidity. However, such a scenario is not unprecedented, as the Bank of England (BoE) has demonstrated in the past. Thus, one cannot dismiss the possibility of similar Fed action.

Although the odds favor a 25 bps rate hike from the Fed, it will be crucial to monitor the central bank's assessment of the underlying banking conditions for the US economy, given the recent failures of commercial banks.

Market pricing has fluctuated dramatically over the past 10 days, with investors initially anticipating a larger half-point rate increase before banking stresses emerged, then at one point expecting rates to remain unchanged. Among economists, those predicting a quarter-point rise do not discount the possibility of a pause.

Following the Fed's decision, markets will await the Swiss National Bank's (SNB) policy announcement. In light of the Credit Suisse turmoil, the likelihood of a 50 bps rate hike has diminished.

Levels to watch