EUR/SEK drops to 5-week lows around 10.50

• EUR/SEK extends the downside to sub-10.50 levels.
• The Riksbank left the repo rate unchanged on Wednesday.
• The central bank revised lower its inflation forecasts.

The Swedish krona is gathering further traction on Wednesday and is forcing EUR/SEK to clinch fresh 4-week lows in the 10.50 region.

EUR/SEK offered post-Riksbank

The cross has resumed the downside on Wednesday after the Riksbank left the repo rate unchanged at 0.0% at its meeting on Wednesday.

The Scandinavian central bank acknowledges that the strong levels of domestic economic activity have subsided somewhat and are now more balanced. The Riksbank now sees the inflation tracked by the CPIF at 1.3% this year (from 1.7%) largely due to lower energy prices. Inflation in 2021 and 2022 are seen unchanged at 1.7% and 1.9%, respectively.

Regarding GDP, the Nordic central bank now expects the economy to expand more than initially projected at 1.3% in 2020 (from 1.2%), 1.8% in 2021 (from 1.7%) and 2.0% in 2022 (from 1.9%).

From the statement, the Riksbank is expected to keep rates at current levels at least through 2021 and probably H2 2022, while the repo rate is seen at 0.20% by end of Q1 2023. The current QE programme is expected to run until year-end, as planned.

What to look for around SEK

The krona has regained upside traction in February following the persistent depreciation seen since mid-December, particularly following the interest rate hike by the Riksbank. In spite of healthy (resilient?) fundamentals, the small and open Nordic economy remains threatened by trade frictions between the US and China (in light of the upcoming ‘Phase 2’ negotiations and via its impact on Germany, Sweden’s key trade partner). Therefore, SEK is predicted to face quite a volatile year, although a rate cut by the Riksbank would need a severe deterioration of the economic outlook, something that looks quite unlikely at the moment and specially after the central bank revised up its forecasts for GDP for the 2020/23 period at Wednesday’s meeting.

EUR/SEK levels to consider

As of writing the cross is retreating 0.21% at 10.4936 and faces the next support at 10.4497 (2020 low Jan.3) seconded by 10.3769 (monthly low Apr. 2019) and finally 10.1249 (monthly low Dec.31 2018). On the upside, a break above 10.5894 (weekly high Feb.10) would expose 10.6390 (200-day SMA) and then 10.6915 (2020 high Feb.3).