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Riksbank Likely to Delay Rate Hike as Political Gridlock Continues

Riksbank Likely to Delay Rate Hike as Political Gridlock Continues

Dimitri Zabelin, Analyst

TALKING POINTS – USD/SEK, RIKSBANK, RATE HIKE, POLITICAL GRIDLOCK

  • The Riksbank will likely raise rates for the first time in seven years in February
  • Rate hike postponement is likely due to slowing economy and political gridlock
  • USD/SEK may fall in short term but long term outlook indicates upward trend

See our free guide to learn how to use economic news in your trading strategy!

The Riksbank’s upcoming policy meeting will likely disappoint – but not surprise – Krona bulls who are anxiously waiting for a hike after seven years of expansionary policy. Interest rates have remained at -0.50 percent since 2016, and the central bank has stated it will raise rates either this week or in February. Markets are not pricing in a rate hike for this year given the increasing political and economic complications.

Growth in Sweden has been slowing down recently and trade wars have certainly weighed heavily on the export-driven economy. Inflationary pressure has been cooling and other indicators have presented a “rather gloomy” outlook – as Riksbank official Martin Floden stated – for the Swedish economy going forward.

This comes on top of unprecedented political gridlock that has left Sweden without a formal government since September 9. Two candidates for prime minister have been voted down so far and several have failed to form a viable coalition. The country is getting closer to a snap election, leading to a possible rise in the nationalist Sweden Democrats. Their popularity reflects a broader trend toward nationalism in Europe.

The circumstances outlined above have weighed down on the Krona, with USD/SEK trending 15 percent higher since the start of February. The pair has almost consistently traded in the 9.0087-8.9615 range since late May, but more recently has tested a possible support at 8.7527. The pair is not likely to significantly deviate from its current trend but may see more substantial gains into 2019.

However, in the short term, USD/SEK may fall as Sweden’s government implements a potential inflation-boosting budget plan from the center-right coalition. This would come against the backdrop of a highly probable rate hike in February. However, if the forecasts for global growth in 2019 hold true, the potential economic turmoil may drive traders away from the Krona and to the US Dollar amid broader risk aversion.

USD/SEK – Daily Chart

USD/SEK - Daily Chart

USD/SEK TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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