Riksbank and Struggling Krona Help Drive GBP/SEK Rebound

"In our view, the increase is a direct result of international rates rising far more than expected in April and the upside risk to inflation if the SEK continues to weaken" - DNB Markets.

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The Swedish Krona sustained fresh losses following the Riksbank's latest effort to strengthen the currency with a more hawkish calibration of its monetary policy, leaving a bullish market to lift GBP/SEK from its June lows, though other factors more particular to Sterling could yet marr the outlook for the latter.

Sweden's Krona was volatile before eventually succumbing to fresh losses against many currencies including the Pound on Thursday after the Riksbank matched the market consensus by raising its cash rate to 3.75% and signaling a small probability of more than one additional increase coming later this year.

The cash rate decision also came accompanied by an increase in the monthly target for the quantitative tightening initiative now reversing the pandemic-period government bond buying initiative through sales set to be worth five billion Krona per month from here, up from 3.5 billion previously.

"The Riksbank’s argument for speeding up its QT was that it could contribute to a stronger SEK and improve the Riksbank’s capacity to reduce inflation," writes Carl Nilsson, an economist at Swedbank, in a note following the decision.  

"The Riksbank revised the core inflation forecast slightly higher. Importantly, the Riksbank put more emphasis on the effects of the weak exchange rate and suggested that the impact may be larger now than usual," he adds. 

Above: GBP/SEK shown at hourly intervals alongside USD/SEK and EUR/SEK. To optimise the timing of international payments you could consider setting a free FX rate alert here.

Sweden's Krona remained one of the biggest fallers among major currencies for the recent month and year on Thursday after appearing to be undermined by sharp increases in expected interest rates elsewhere in the world through May and June.

"In our view, the increase is a direct result of international rates rising far more than expected in April and the upside risk to inflation if the SEK continues to weaken," says Oddmund Berg, an economist at DNB Markets in Norway.

"While the weaker SEK was assessed to not be a major contributor to inflation development so far this year and is not expected to have a large impact going forward, there is a risk that unless the Riksbank follows international rates, the SEK will not strengthen as much as implied by their forecast," he adds.

Gains for the Krona were limited on Thursday perhaps because interest rate markets had already assumed the Riksbank cash rate would likely rise as far as 4.25% before long and the latest forecast was lifted to only 4.1% was already priced in.

"The forecast is that the policy rate will be raised at least one more time this year and after that will remain at a contractionary level for a relatively long period of time. However, there is still considerable uncertainty," the RIksbank said on Thursday. 

Above: GBP/SEK shown at daily intervals alongside USD/SEK and EUR/SEK. 

"It is still uncertain how much monetary policy tightening will be required for inflation to fall back and stabilise close to the target of 2 per cent. But the Riksbank will do what is needed. New information, and how it is expected to affect the economic outlook and inflation prospects, will be decisive," Thursday's policy statement added.

The Pound to Krona exchange rate extended its gain for the year to more than 7% in May and June as inflation figures surprised on the strong side of expectations in the UK and implied expectations for the Bank of England Bank Rate surged to suggest a high probability of the benchmark reaching 6.25% this year.

But appetite for Sterling itself has appeared to wane over the recent week while remarks from Governor Andrew Bailey on Wednesday suggested the BoE might feel it has already responded sufficiently to official figures suggesting wage growth and some important measures of inflation have accelerated again in the UK recently.

Tall order expectations of the BoE, its possible difference of opinion with the market, and the already large size of a sharp earlier increase of bets in favour of Sterling are just some of the factors that could complicate any effort by Sterling to extend its multi-month rally against the Krona up ahead. 

"Given Sweden’s higher level of floating rate mortgages and the lack of consumer excess savings, Sweden’s growth has significantly disappointed. You could argue it is in the price, but the SEK rates market would be in absolute disagreement," says Jordan Rochester, a G10 FX strategist at Nomura and advocate of selling the Krona.

Above: GBP/SEK shown at daily intervals alongside USD/SEK and EUR/SEK. To optimise the timing of international payments you could consider setting a free FX rate alert here.