The SEK responded to the Riksbank’s dovish commentary by dropping lower vs the EUR. However, with Sweden’s 2020 GDP growth outlook looking better than most of its peers, economists at Rabobank question whether this weaker tone can be sustained vs. the EUR. They forecast the EUR/SEK pair trading back to the 10.40-10.50 in the coming months.
“At last week’s policy meeting, the Riksbank forecast 2020 CPI inflation at just 0.6% y/y and the unemployment rate at a hefty 8.6%. In both cases the forecasts were a little better than the projections contained in the Riksbank’s July Monetary Policy Report. That said, they clearly paint a weak economic outlook. Faced with this backdrop, the forward guidance offered by policy-makers was very dovish in tone.”
“The Riksbank revised its 2020 GDP projections last week. For the year as a whole GDP is expected to contract by -3.6%. This compares with a forecast of -4.5% made in July. Next year’s growth forecast has been revised higher to 3.7% from a previous forecast of 3.6%.”
“Insofar as domestic CPI inflation is well below the 2.0% y/y inflation target and with unemployment high particularly among the young high, there would appear little chance that the Riksbank will back away from its QE and liquidity programmes any time soon. That said, given the Riksbank’s previous concerns about negative rates, we don’t see a decision in that direction for the time being.”
“We expect a move back towards the EUR/SEK 10.40/10.50 range in the coming months.”
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