Summary:

• Swedish Krona hits highest level since March 
• Underlying inflation for July rose to +2.4% Y/Y
• First time above Riksbank’s 2% target in 7 years

A higher than expected reading for inflation in Sweden has boosted the Krona, sending the currency to a 5-month high. The latest data on inflation showed a 2.4% rise Y/Y for the past month which was substantially higher than many forecasters predicted. Only one of the nine economists surveyed by Bloomberg predicted such a strong reading and the central bank’s own forecasters had predicted an increase of only 1.8%. 

Two of the main contributors to the unexpected rise in prices were the higher cost of package holidays and increases in electricity costs. The data has raised hopes that the Riksbank could bring forward its plans to raise interest rates away from their current record low of -0.5%. Despite Sweden’s booming economy the central bank have been reluctant to hike rates with inflation stubbornly persisting below the 2% target. In fact this morning’s release was the first time since 2010 that a print has been in excess of 2% 

 The USDSEK pair fell sharply following the release with price falling close to the 8 handle. The cross shed approximately 70 pips after the data point as the Krona surged higher. Source: xStation

A weekly chart reveals the extent of the decline seen in 2017 after price peaked around 9.450 last December. The market is now approaching a potentially key support level around 7.900- 8.005. This has attracted buyers into the market on several occasions previously and it may well be worth watching for any reversal signals in this region ahead. A break below 7.900 would be a major bearish development and would open up the possibility of further declines towards 7.200.  

 USDSEK is approaching potentially key long term support in the 7.900-8.050 region. Source: xStation

 From an intermarket perspective a chart of the USDSEK looks strikingly similar to that of the USD index (USDIDX). Since 2014 there has been a high degree of correlation between the two which could be seen as suggesting that the majority of the moves in the USDSEK are driven by the USD side of the pair. This is particularly interesting given today’s move as it could mean that the SEK side of the pair will grow in importance in the coming months.   

 USDSEK and USDIDX have exhibited a high degree of correlation in recent years. This suggests that the USDSEK pair has been largely driven by the USD side. Should the Riksbank begin to raise rates out of negative territory then the SEK side may become more influential for this pair. Source: xStation