SEK soars as Riksbank keeps signalling to hike rates this year

Summary:

• Swedish central bank leaves rates unchanged and keeps signalling the first rate hike at the end of the year
• Inflation forecasts for this and following year have been lifted
• EURSEK tumbles toward its crucial technical support

The Swedish monetary authorities decided to leave interest rates unchanged during their July meeting matching economists’ expectations. At the same time, the bank lifted its inflation projections thereby solidifying odds for a hike yet this year, and explicitly signalling rate increases may start toward the end of the year. The SEK appreciated substantially in the aftermath of the statement becoming the strongest major currency.

Riksbank bumped up its inflation estimations, but lowered those for GDP growth. Source: Riksbank

The paramount point of the statement concerns obviously the onset of monetary tightening which may start toward the end of the year. Claiming so, the bank kept its stance presented earlier this year, and the SEK moved sharply higher even as everybody well knows that any rate increases will be delivered in a gradual fashion. The statement also underlined that inflationary pressures are moderate (the view shared by governor Ingves during his press conference as well), and on that account monetary policy still needs to be expansionary. The communique acknowledged that international economic activity is strengthening, albeit uncertainties have increased. Speaking at the press conference Ingves informed that some uncertainties (possibly pertaining to global trade frictions) have not been baked into forecasts yet. Simultaneously, he affirmed that labour demand should push up wage growth in Sweden. In turn, as far as the SEK ex-change rate is concerned, Ingves said there are good reasons to believe the krona will strengthen, and concurrently stressed importance the SEK not to appreciate too quickly.

Taking a look at the table above one may notice that both headline and core inflation projections for this and next year were revised upwardly, in part due to higher oil prices as Ingves said. However, there is no doubt that elevated capacity utilization in the mining and manufacturing sectors could (it is hovering above 90%) encourage companies to increase their investment spending if they keep an optimistic view as regards the future demand. If so, it may boost GDP growth more than the central bank currently expects and thereby persuade Riksbank members to delivering gradual rate increases. At the end of the day, the bank kept estimated repo rate levels untouched through the whole forecast window.

The EURSEK plunged following the Riskabank’s meeting as it has made investors more certain regarding a rate increase in the last quarter. Technically the pair has already approached its relevant support area nearby 10.32 being underpinned by the two Fibonacci retracements. Earlier the pair perfectly respected the resistance placed at 10.46. Looking forward, one may expect the krona to continue climbing against the euro (versus the US dollar alike) with the next probable stoppage at around 10.22. Source: xStation5