Summary:

  • Swedish CPI disappoints in September across the board, clothing and footwear among culprits
  • SEK tumbles following the inflation report as a first rate hike becomes more distant
  • EURSEK could be rising in the nearest future, the bond market could put the brakes on a rally though

Swedish inflation fell short of estimations in September receding a date when a first interest rate hike could take place. Even as both CPI and CPIF stayed above the Riksbank’s target, the SEK tumbled immediately after the release. Moreover, wage growth in the Sweden’s economy suggests that inflation may be slowing down further which could sap the SEK at least in the short term.

link do file download linkSwedish inflation misses estimations in September but stays above the central bank’s objective. Source: Macrobond, XTB Research

Firstly, let us remind that CPIF became the most important gauge of price dynamics in the Swedish economy as the Riksbank set it as its official price target. CPIF came in at 2.3% yoy in the last month meaning a lack of a change compared to August while the consensus had suggested a 2.5% yoy pick-up. Besides, CPI (a bit less relevant measure as for now) stayed unchanged in September as well showing a 2.1% yoy increase whereas a 2.4% yoy rise had been predicted. On the surface, the data was clearly disappointing which could cut back on rising odds for a shift in rhetoric of the central bank.

link do file download linkWage growth in the Swedish economy has been sluggish lately heralding a rise in inflation could be temporary. Source: Macrobond, XTB Research

Moving on, it’s worth underlining that wage growth in the Swedish economy has been lackluster over the course of the recent months which could act not in favor of consumer outlays as real wage growth is being undercut. Notice that the SEK has appreciated quite substantially against the single currency since the end of June (a decline from 9.80 to below 9.50) and it could be one of the reason (a lagged effect) why inflation has stopped short of increasing. Swedish policymakers seem to be cognizant of an adverse effect on price dynamics stemming from the stronger krona and they’ve already stressed repeatedly the importance of the SEK not strengthening too much and too quickly. 

To sum up, inflation in Sweden still hovers around the Riksbank’s goal, however it needs to be sustained in order to convince more policymakers that some adjustments in monetary policy might be justified, albeit higher wage growth is necessary to make inflation less detrimental to consumers and businesses. Thus, one needs to wait to see whether today’s release is a blip or just a one-off event. Either way, the SEK appears to be worth keeping a close eye going forward but a short-term pullback could occur in the aftermath of weaker than anticipated inflation trends.

link do file download linkThe EURSEK has surged after the release and could keep on rising give where the nearest more notable resistance is placed. Source: xStation5

Technically, the EURSEK has strongly bounced back and bulls could take the price yet higher given momentum fueled by the inflation report. Buyers could aim for 9.6240 as their next major obstacle where some supporters of the Swedish currency might lurk. Finally, let’s emphasize that a rally on the EURSEK could be restrained give the bond market.

link do file download linkThe bond market suggests that any upside on the EURSEK might be contained as the spread of the 10Y yields points to a lower rate. Source: Bloomberg