SEK: Brightening outlook? – Rabobank

In terms of the rhetoric provided by the Riksbank in recent weeks, there would appear to be relatively few concerns in Sweden about the risks associated with sticky inflation. There was no expectation in the market that the ECB would follow up its June rate cut with another move at today’s policy meeting on the back of signs of sticky wages and robust services sector price pressures, senior FX strategist at Rabobank Jane Foley notes.

EUR/SEK to move lower towards its long-term average levels

“The last Riksbank policy meeting, there were hints regarding the prospect of three, rather than two, more rate cuts in the second half of this year. The dovish sentiments of the Riksbank have weighed on the value of the Swedish Krona (SEK) vs. the Euro (EUR) since late June, with the recent rally in EUR/SEK wiping out around half of the gains the SEK had made against the single currency this spring.”

“That said, while interest rate differentials have weighed on the SEK, the door is wide open for an ECB rate cut in September. Hopes for further easing from the ECB combined with improvement in Sweden’s growth and fundamental outlook suggest scope for EUR/SEK to move lower and towards its long-term average levels over the months ahead.”

“As a consequence of the sell-off in the SEK in that period, EUR/SEK is currently trading well above its 5-year average level of 10.76.  As growth returns, we expect the SEK to outperform the EUR. While Riksbank rate cuts are likely to hinder the SEK’s recovery near-term, on the assumption that the ECB cuts rates twice more this year, we maintain a 6-month EUR/SEK forecast of 11.00, though we have edged up our 1-month view.”