SEK adds to recent gains as Skingsley reinforces hawkish message

Summary:

• Swedish krone continues to strengthen against both USD and EUR

• Deputy Governor Skingsley reinforces Riksbank’s hawkish message

• USDSEK trades at the upper limit of the long term consolidation range

While the Norwegian krone has been one of the best majors YTD against both EUR and USD (losing only to JPY) the same cannot be said about the Swedish currency. SEK has been unquestionably the weakest currency in the G10 basket in the first half of 2018 losing 8.5% against the US dollar and almost 6% against the common currency.

However, beginning of the second half was really pleasing for the Swedish currency. Let us recall that Riksbank, the Swedish central bank, did not raise interest rates during yesterday’s meeting but the message coming along with the decision can be viewed as hawkish. The Bank recognized that the inflation is hovering around set target and decided to lift its price growth forecast strengthening its hawkish rhetoric. Moreover, 2 out of 6 Riksbank’s members opted for an immediate hike during July’s meeting. In turn we observed SEK strengthening significantly against both USD and EUR. Today the Scandinavian currency was offered another boost, this time by comments from Deputy Governor Cecilia Skingsley and the services PMI reading.

Along with the decision Riksbank published an updated forecast for the Swedish economy yesterday. Central bankers raised the inflation forecast while lowering the outlook for GDP growth. Source: Riksbank

The Deputy Governor Skingsley admitted that the inflation is back on track and reiterated that Riksbank want to be sure that it is “on firm ground” prior to any rate hikes. Therefore one can assume that in case the economy develops as expected the Bank should begin to normalize its monetary policy later this year. The Swedish central banker did not rule out a rate hike during October or December meetings. While markets do not fully price in a hike in October the odds for an interest rate increase during December’s meeting stand currently at 55%. It is worth to note that in case we see a rate hike this will be first such move in seven years. Moreover, Mrs Skingsley ensured that the general outlook of the central bankers is to not conduct more bond purchases signalling that the hawkishness among Riksbank members is growing.

Taking a look at the USDSEK daily interval one can see that the pair is approaching a support level at 8.79. Do notice that the price reacted to this hurdle several times in the past year therefore we may see another bounce this time. Source: xStation5

Apart from hawkish comments from Deputy Governor Skingsley the Swedish krone could have been boosted today by an upbeat services PMI reading. The services gauge rose from 57 pts in May to 59.8 pts in June. Looking at the index components the biggest gains were observed in business volumes and suppliers’ delivery times subindices. Quite a noticeable advance was also seen in employment subindex as it rose from 54.5 pts to 57.9 pts.

Looking at EURSEK from the weekly perspective one can see that the pair still trades within a zone that served as an upper bound of the consolidation started in early-2015. In case the bearish momentum prevails we may see the pair pull back to the lower limit of the trading range (7.84-8.04). Source: xStation5