Sell the Pound against the Swedish Krona: Soc Gen

With inflation above target and the ECB soon to begin tapering, the Riksbank could be about to move, which might mean more losses for GBP/SEK.

Traders should sell the Pound-to-Swedish-Krona short, according to Societe Generale, as an economic slowdown in the UK could conspire with an upturn in Sweden to push the exchange rate lower during the months ahead.

Strategists at the French bank have recommended trading clients sell the GBP/SEK pair at around the 10.42 level, placing a stop loss at 10.70 and targeting a fall to the 9.90 area.

The idea comes after the Riksbank decided to leave its key interest rate, which sits deep below the water line, unchanged at -0.50% in September while maintaining its quantitative easing program despite an economy that some see as being in danger of overheating.

“Growing worries over the slow pace if Brexit negotiations as the two-year deadline ticks down combined with UK growth deceleration should keep sterling under pressure. Against this is the strong economic and inflation upturn in Sweden, which should continue to buoy the Krona,” says Alvin Tan, a strategist at Societe Generale.

The Pound-to-Swedish-Krona exchange rate was quoted 0.27% higher during early trading in London Friday, with bids and offers accepted around the 10.4031 level. However, it is down by more than 7% for the year to date, in line with is performance against the euro.

“Although the Riksbank remains cautious, the time for policy normalisation is drawing closer and the market is forward-looking,” says Tan.

While the Riksbank does not have a formal peg to the euro, a key consideration in the formulation of Swedish monetary policy is the Krona's relative strength against the common currency, which has broad influence over Swedish inflation.

As a result, monetary policy between the Euro area and Sweden is inextricably linked and with market expectations being for the European Central Bank to begin a slow plod toward normalised policy before the year is out, a shift could also be in the pipeline at the Riksbank.

“According to a well known myth a frog in heating water will stay oblivious to its condition until it is cooked. The question is whether the same is true for the Swedish economy,” wrote the Skanidnaviska Enskilda Banken (SEB) strategy team in its morning note Friday.

Swedish inflation rose past the 2% target for the month of July, coming in at 2.4%, for the first time since 2010 while the economy has continued to grow strongly in recent quarters.

Meanwhile, UK economic growth has slowed in the first half of 2017, aided by a slowdown in consumer spending, while the economy has continued to give off mixed messages in the second half.

The Bank of England will announce its latest policy decision on Thursday, September 14, amid a growing debate over whether current conditions will mean it eventually has to cut rates again, or whether it prioritises heading off inflation with a rate hike.