Why Swedish Krona Weathered the Inflation Undershoot

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The Swedish Krona has weathered a surprisingly soft inflation release thanks to a broadly supportive global investor backdrop.

The Pound to Krona exchange rate is down on the day at 13.59, whereas we would have looked for a decent jump on account of news Sweden's month-on-month inflation rate rose 0.3% in April, less than the 0.4% the market was expecting.

The annual rate slipped to 3.9% from 4.1% said the SCB, which was surprisingly softer than the 4.0% the market was looking for.

The subdued response from the SEK suggests two things: 1) the inflation data isn't really enough to shift the dial at the Riksbank, and 2) other factors are at play.

"Does this mean the Riksbank will cut again in June? As things stand now, it does not look very likely," says Francesco Pesole, FX Strategist at ING Bank.

The central bank cut interest rates on May 08 and signalled it would not be entertaining back-to-back rate cuts.

ING says a generally "less dovish tone" by the ECB combined with delayed Fed easing plans should disincentivise another cut in June. In short, the inflation undershooting won't change the minds of policymakers.

The stronger SEK also suggests external factors are at play. The global backdrop remains supportive of high beta currencies in the near term with European indices hitting fresh highs and U.S. indices looking to follow suit.

"The krona remains primarily driven by external dynamics," says Francesco Pesole, FX Strategist at ING Bank.

Rising equity markets are supportive of currencies such as SEK which are prone to broader sentiment owing to the small and open nature of Sweden's economy and financial system.

There was some excitement Tuesday when PPI inflation from the U.S. beat expectations, prompting a Dollar rally and market slide. But when the finer details of the report were digested, it was clear that this was, in fact, quite a benign report, and markets reversed course.

"Financial markets had a remarkable session yesterday," says Marco Valli, Global Head of Research at UniCredit Bank. "What made the day remarkable were solid gains in US equity markets... the S&P 500 finished just six index points short of another all-time-high."