The Swedish Krona (SEK) remains under pressure as market uncertainty and the Riksbank’s dovish outlook continue to limit its upside potential. Commerzbank’s FX analyst Antje Praefcke highlights that the Riksbank’s decision to frontload rate cuts in November, reducing the key interest rate by 50 basis points (bps) from 3.25% to 2.75%, signals further cuts are on the horizon.
Riksbank’s Policy Path: Rate Cuts Expected
The Riksbank is expected to maintain its rate-cutting cycle, with potential reductions in December and during the first half of 2025. This aligns with its earlier September communication. On Thursday, the Riksbank will publish its Monetary Policy Report, outlining updated inflation, growth forecasts, and its interest rate path. Currently, markets anticipate a terminal rate of 2%, but the central bank’s outlook remains pivotal.
The Riksbank’s primary concern lies in the risk of inflation undershooting, driven by weak economic growth. Although early indicators suggest some signs of recovery, Eurozone growth remains sluggish, adding further pressure on Sweden’s economic prospects. To combat this, the central bank may persist with rate cuts to stimulate the economy and stabilize inflation.
Limited Upside for the SEK
If the Riksbank signals a lower terminal rate in its upcoming meeting, reinforced by weak inflation and growth projections, the SEK could face short-term downward pressure. However, since the market already perceives the Riksbank’s stance as dovish, the negative impact on the Krona may be muted.
Despite this, the SEK’s upside potential remains constrained. Elevated global uncertainty, particularly with the risk of higher tariffs under a new US President-elect Trump administration, adds to the burden. Lingering concerns around trade tensions and market instability are likely to limit any significant recovery for the Krona in the near term.
The combination of the Riksbank’s dovish stance, weak Eurozone growth, and heightened global uncertainty ensures that the SEK will remain under pressure. While rate cuts are aimed at stabilizing inflation, they simultaneously cap the Krona’s upside, leaving it vulnerable to external market risks.
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