Fundamental Analysis: SEK Retreats from Two-Week Lows

Fundamental Analysis: SEK Retreats from Two-Week Lows

The Swedish krona has bounced slightly with some volatility today in the absence of significant economic data. Monetary policy has had a continuing negative impact on SEK since April. Conversely, paired currencies have also faced some headwinds from policy, especially the dollar. Sweden’s benchmark index of shares has also been fairly inactive today.

USDSEK has declined very slightly from today’s Asian open to around 9.44 kr. The euro also weakened somewhat against the krona below the area of 10.70 kr. Conversely, the pound has made a slight gain overall above the critical psychological area of 12.00 kr.

Limited positivity from the eurozone and shares

A somewhat brighter outlook in the eurozone so far this month had given a degree of fundamental support to SEK. The ECB’s last meeting with its change to rates for TLTRO III helped the krona as well as the euro to make some gains. Sweden’s economy is driven strongly by exports to the rest of the EU, particularly Germany and the UK. This means that conditions in neighboring countries often affect SEK noticeably.

The OMX Stockholm 30 has also made fairly decent gains over the past few days of trading. Sweden’s benchmark index has bounced from lows at the end of last month. The correlation between the OMX 30 and the krona isn’t as strong as other countries’ equivalents, but shares do have a degree of influence.

Monetary policy could mean more headwinds for SEK

Although June so far has been a bit less negative than the previous couple of months, the outlook for SEK based on policy is still fairly weak. The Sveriges Riksbank left its repo rate at negative 0.25% at its last meeting in April as universally expected. However, Governor Stefan Ingves noted that the next hike will be later than some analysts had expected.

An exit from negative rates at the end of this year or the beginning of next has continued to weigh on SEK. This would mean that USDSEK’s differential is likely to remain at least 2.25% against the krona for the next couple of quarters.

On the other hand, the most recent inflation data from Sweden has been fairly strong. The annual figure of 2% (CPI fixed interest) in April is the highest since January and exactly on the Riksbank’s target. Friday’s data is expected to provide more clarity on any potential trend in annual CPIF.

All eyes on CPIF on Friday

Friday morning is centrally important for traders of the krona. Four items of inflation data for May are due at 07.30 GMT:

  • Monthly CPIF: previous 0.6%, consensus 0.1%
  • Annual CPIF: previous 2%, consensus 2%
  • Annual inflation rate: previous 2.1%, consensus 2.1%
  • Monthly inflation rate: previous 0.7%, consensus 0.2%

No big changes are expected. However, if annual CPIF reads lower than the consensus, SEK could face a sharp drop in the short term at least.

Today, though, the key releases are American inflation at 12.30 GMT. Core inflation in the USA is expected to remain steady at 2.1%. This figure is centrally important for the Fed’s next meeting and rumors of a rate cut in the USA.

Krona might remain calm this week

The absence of major news driving the krona means that SEK’s most favorable direction fundamentally is sideways over the next few days. However, the likelihood of a rate cut by the Fed will be an important factor for USDSEK. Traders should also note key technical areas, particularly for GBPSEK around 12.00 kr.

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