EUR/SEK to face downside pressure as ECB-Riksbank divergence increases – MUFG

This month, the Swedish krona has also weakened (-2.8%) against the euro. It has been the worst period of performance for the krona since September of last year. The Riksbank will deliver its latest policy update today. Economists at MUFG Bank expect the SEK to appreciate against the euro as the divergence between their central banks intensifies.

The domestic COVID-19 situation in Sweden does not appear so bad

“New covid cases have risen less sharply in Sweden over the past month and are still well below levels recorded last winter and during the first half of this year. It puts less pressure on the Swedish government to re-tighten restrictions. The Swedish krona has though failed to benefit so far from this relatively favourable COVID-19 trend.”

“We expect the Riksbank to follow other central banks by delivering a more hawkish policy signal but the planned pace of tightening should remain relatively slow.”

“We expect the Riksbank to begin raising rates in 2023, and policy tightening next year is more likely to focus on shrinking their balance sheet. It should lead to greater policy divergence with the ECB placing modest downward pressure on EUR/SEK in the year ahead.” 

“We expect the Swedish krona to rebound against the euro once current market fears subside. However, it should continue to underperform more broadly as the Riksbank lags other G10 central banks in tightening policy alongside the ECB.”