EUR/SEK to head higher towards 10.20 as Riksbank is unlikely to rescue the krona – ING

Economists at ING expect Sweden's Riksbank to hike rates from late 2023, though policymakers are likely to remain reluctant to endorse much tightening when the Bank meets this Thursday. Despite the recent rally, EUR/SEK is not overvalued in the short-term, and a cautious Riksbank announcement may generate more SEK weakness this week, in their view.

Cautious Riksbank may add pressure to krona

“Despite the recent rally in EUR/SEK, the pair is not showing signs of overvaluation, according to our short-term fair value model.”

“We expect the Riksbank to push back against market speculation that the tightening cycle will start as early as 2022. Despite our view that policymakers won't be able to delay tightening beyond 2023, the Riksbank is likely aware that adding a 2023 rate hike to their current forecasts will be a de-facto confirmation that hawkish bets are warranted and would likely cause a hawkish re-pricing in the SEK money market.”

“We think the Riksbank will disappoint hawkish expectations this week, and we expect some dovish re-pricing of rate expectations. In FX, this should translate into more SEK weakness in our view, although losses should be more marked against the USD than against the EUR. Still, EUR/SEK may approach the 10.20 level this week.” 

“Looking beyond the short-term, a quite strong negative seasonality for EUR/SEK in December suggests the pair could gradually converge to the 10.00 level again by year-end. That is, however, conditional on the ability of EU countries to face the new Covid wave without strict containment measures.”