Swedish Krona Faces Potential Downturn on Dovish Riksbank Policy

The Swedish Krona (SEK) is under pressure ahead of a crucial policy meeting by the Riksbank, Sweden’s central bank, scheduled for Wednesday. Economists at MUFG Bank anticipate a dovish shift from the Riksbank, potentially leading to a rate cut as soon as May, and are recommending a long EUR/SEK trade position.

Dovish Shift Expected, Rate Cut on Horizon

MUFG Bank believes the Riksbank will signal a more dovish policy stance, paving the way for a rate reduction in the coming months. While a cut at Wednesday’s meeting is unlikely, updated guidance could open the door for a decrease as early as May.

This dovish turn reflects Sweden’s slowing economic growth and moderating inflation. After a period of aggressive rate hikes to combat inflation exceeding 10%, Sweden’s inflation rate has settled near the Riksbank’s target of 2%. However, economic growth has stalled, and unemployment is rising.

Potential Risks and Analyst Predictions

MUFG acknowledges two primary risks to their trade recommendation. Firstly, the Riksbank might adopt a cautious approach due to concerns about further SEK weakness. Secondly, a stronger-than-expected global and Swedish economic recovery could bolster the Krona.

A Reuters poll aligns with MUFG’s outlook. The poll predicts the Riksbank will maintain the current 4.00% rate but signal future cuts if inflation remains subdued. Analysts are divided on the timing of the first cut, with some expecting it in May and others in June.

Balancing Inflation and Growth

The Riksbank faces a balancing act. While taming inflation was a priority during the previous tightening cycle, the central bank now needs to support a sluggish economy without reigniting inflation.

The memory of negative interest rates, implemented from 2016 to 2022, also influences the Riksbank’s approach. While negative rates helped stimulate borrowing, they also weakened the Krona. The central bank is likely cautious about repeating this scenario.

Following the lead of the U.S. Federal Reserve and the European Central Bank, both expected to cut rates in June could provide the Riksbank with greater confidence to ease policy.

Future Trajectory

With benign inflation, a stagnant economy, and moderate wage growth, analysts anticipate further rate cuts after the initial decrease. The median forecast suggests rates could end in 2024 at 3.00% and fall to 2.25% in 2025.

In conclusion, the Swedish Krona faces potential depreciation due to the Riksbank’s anticipated dovish policy shift. The timing of the first rate cut remains uncertain, but analysts expect it to occur in the coming months. The central bank will navigate the competing needs of curbing inflation and bolstering economic growth.

EUR/SEK Long (Buy)
Enter At: 11.491382
T.P_1: 11.513798
T.P_2: 11.532945
T.P_3: 11.556348
T.P_4: 11.585602
T.P_5: 11.609005
T.P_6: 11.632409
S.L: 11.380825


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