Swedish Krona Jeopardises GBP/SEK Uptrend after Riksbank Confronts Inflation

• GBP/SEK losses leave 2021’s uptrend under strain 
• After Riksbank raises rates, signals more to come
• EUR/SEK losses leave major chart support at risk

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The Swedish Krona outperformed all other major currencies in the penultimate session of the week, pushing the GBP/SEK exchange rate back toward its late March lows and in the process jeopardising Sterling's 2021 uptrend after the Riksbank sought to confront a growing inflation problem.

Sweden’s Krona rose against all counterparts within the G20 contingent of major currencies on Thursday after the Riksbank surprised the market by lifting its cash rate for the first time since before the coronavirus crisis when many had expected it to be left unchanged at 0%.

The cash rate was lifted to 0.25% while the Riksbank indicated in April’s forecasts that its benchmark for borrowing costs is set to rise further this year and next, likely taking it up to 1.75% by the early months of 2025.

“We were in a minority (3 out of 17 surveyed by Reuters) of forecasters predicting a 25bp rate hike in April, and today’s announcement completes a remarkable U-turn from the Bank’s thus-far decidedly dovish stance,” says David Oxley, a senior Europe economist at Capital Economics.

Above: Pound to Krona exchange rate shown at daily intervals with Fibonacci retracements of 2021 uptrend indicating possible areas of technical support for Sterling. 

“While the Bank has spoken of the need to tread carefully with their tightening cycle, in practice we expect policymakers to tighten faster than they currently project,” Oxley also said on Thursday. 

In addition, the Riksbank said it would begin the delicate process of extricating itself from the Swedish government bond market immediately by ceasing its purchases of the shortest-term government debts and by paring back the amounts it reinvests in government bonds each time an asset on its balance sheet reaches maturity. 

“The Executive Board has now decided to reduce the pace of these purchases during the second half of 2022, so that the holdings begin to decline. The Riksbank will buy bonds for SEK 37 billion during the second half of the year, which is half the purchases made during the first half of the year. The Executive Board has also decided that the Riksbank will cease buying treasury bills with effect from 28 April,” the Riksbank said in its statement.

Much like in other countries, rising energy and food prices have lifted inflation to more than six percent in Sweden and gotten the Riksbank worried that corporate price setting practices and workers’ wage demands will respond in a way that leads above-target levels of inflation to become entrenched.

Above: Above: Pound to Krona exchange rate shown at daily intervals with Fibonacci retracements of December 2017 uptrend indicating possible short and medium-term areas of technical support for Sterling or resistance for the Krona.

As a result, the bank intends to steadily reverse the growth of its balance sheet that was induced by its crisis-inspired quantitative easing programme, which saw total asset holdings almost double to near SEK 1.6 trillion during the little more than two years to April 2022.

“We also noticed that the Riksbank stressed a preparedness to raise the repo rate faster if needed to ensure that inflation returns to the target. Today’s announcement was generally in line with our expectations. Going forward, we stick to our assessment that the repo rate will be hiked at every monetary policy meeting through April 2023, lifting the repo rate to 1.5%,” says Knut Hallberg, a senior economist at Swedbank. 

The Krona strengthened in the wake of the decision, leaving both Sterling and Euro near to or otherwise testing important levels of support on the charts, levels which would be at risk of giving way in the weeks and months ahead if Thursday’s price action transpires to have marked the beginning of a trend for the Swedish currency.

“We still struggle to see EUR/SEK trade sustainably below 10.20 in the coming weeks. In the longer run, however, the Riksbank’s policy shift is set to offer sustained support to the krona, and periods of stabilised market sentiment (especially in Europe) could see the widening EUR-SEK rate differential push the pair materially lower. We now expect a move below 10.00 in EUR/SEK in the second half,” says Frantisek Taborsky, a strategist at ING. 

Above: EUR/SEK exchange rate shown at daily intervals with Fibonacci retracements of November uptrend indicating possible areas of short and medium-term technical support for the Euro and resistance for the Krona.