Summary:

• Swedish core inflation exceeds levels of its peers
• Bond market points to a lower level of the EURSEK
• Riskbank could adjust its forward guidance as soon as next month

The next Riksbank meeting will take place on July 4, until then, we will have data on retail sales which is scheduled to be unveiled on Thursday this week. When it comes to the Riksbank’s monetary policy decision expectations are there will be no a change in interest rates, however things are changing when we take a look into the future. 

At first, one should say that economic data coming from the Eurozone has been really sanguine of late, nevertheless a so-called economic surprise index cannot increase indefinitely as market’s estimations are becoming harder and harder to beat them. On that account, since mid-May the Citi economic surprise index for the Eurozone has declined noticeably marking the lowest level this year. It doesn’t mean that data has become bad, however economists have become too demanding. 

The difference between Citi’s economic surprise indices for the Eurozone and the Swedish economies has widened in favor of the latter of late. Source: Bloomberg

Having assumed that in the longer-run market participants factor in changes in macroeconomic data it could bode possible decreases in the EURSEK. Needless to say, that discrepancy can be closed both by the exchange-rate and a positive shift in the ratio between above-mentioned indicators. 

Besides, even as the Riksbank decided to extend its QE program for another six months in April it appears that core inflation in Sweden is much firmer in comparison to its major peers like US or Euro Zone. Such developments could encourage the Riksbank to adjust its monetary policy at the meeting as soon as next month. 

 Swedish core inflation is one of the firmest among its peers. Source: Bloomberg

The meeting of the Swedish central bank could be the most interesting for all SEK traders as expectations point to a possible shift in rhetoric towards more hawkish one. Market’s rumors are mounting that the Swedish central bank will remove its easing bias as soon as next month, with at least two major factors driving that thinking. 

The first concerns the action of its peers. The European Central Bank dropped references to lower rates earlier this month, while the Federal Reserve raised its rate target range for the third time in less than a year and also signaled further increases ahead. The second involves global politics. When the Riksbank decided to expand and extend its bond purchase program, back in April, it referred to risks linked to political uncertainty abroad. Since then, anti-globalization forces have been muted in France and the Netherlands, damping fears that the European Union would crumble in the wake of Britain’s decision to leave the bloc. Even Donald Trump’s impact on the world economy appears to have been limited.

Shifts in the bond market seem to point to a possible decline in the EURSEK, the divergence isn’t huge though. Source: Bloomberg

Recent changes which have occurred in the bond market favor a weaker exchange-rate of the euro. The spread between 10y yields of German and Sweden bonds indicate around 9.70 in the EURSEK. If the Riksbank’s forward guidance is more hawkish, it could prop up the SEK going forward. This’s especially true when we take into account still the undue net long positioning in the common currency.

 The EURSEK could be prone to decline if bears manage to break out of the nearest support. Source: xStation5

At the end, let’s take a glance at technical analysis which could herald decreases in the offing. On the H4 time frame the pair is testing the key support zone at around 9.75. What’s more, this level is underpinned by a lower bound of an upward channel as well as the Ichimoku cloud. 

The pair drew a bearish engulfing on Friday, bouncing off a local resistance zone. For that reason, one could assume that if price breaks through 9.75 and closes below it, that could create a decent selling opportunity with the target placed at around 9.70 (it’s supported by the bond market as well).