USD/SEK: Swedish krona rises after final Riksbank interest rate decision

USD/SEK: Swedish krona rises after final Riksbank interest rate decision
Written by:
Crispus Nyaga
November 26, 2020
  • The USD/SEK continued falling after the Riksbank interest rate decision.
  • In its final meeting this year, the bank left interest rates unchanged as widely expected.
  • The pair has fallen by more than 18% since its peak in March

The USD/SEK downward trend continued today after the November Riksbank interest rate decision. It is trading at 8.500, which is 18% lower than the year-to-date high of 10.4885. EUR/SEK and GBP/SEK have also been on a sharp downward trend.

USD/SEK has been on a downward trend

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Riksbank interest rate decision

Sweden has handled the Covid-19 pandemic differently from other countries. The country resisted implementing large-scale lockdowns in both the first and second waves of the virus. As a result, the disease has infected more than 231,000 people and killed more than 6,500.

Like all country’s the economy also contracted in the second quarter and bounced back in Q3 as the number of cases started to fall. However, recently, Sweden has been reporting more new cases as part of the second wave.

It is against this backdrop that Riksbank, the world’s oldest Central Bank, held its final meeting of the year. The next meeting will happen in March 2021.

The bank decided to leave interest rates unchanged, in line with what most economists polled by Reuters were expecting. Most importantly, the bank decided to increase the size of its quantitative easing policy from 500 billion SEK to 700 billion SEK. The purchases will continue until 2021. In a statement, analysts at ING said:

“The fact that a rate cut was avoided at the peak of the pandemic perhaps indicates limited enthusiasm for a u-turn back into negative territory.”

In its forecasts, the bank expects to leave rates at zero at least through 2023. It also expects the headline CPI will end the year at 0.4% and then rise to 0.8% and 1.2% in the following years, respectively. Also, it expects the GDP to contract by 4.0% this year and then rebound by 2.6% in 2021.

US dollar strength

The Riksbank meeting came at a time when forex investorshave pushed the USD/SEK pair to its lowest level since April 2018. By dropping by almost 20% since April, the Swedish krona is one of the best-performing currencies in the developed world.

The recent decline is mostly because of risk-on investors, who have abandoned the dollar as potential market risks ease. For example, investors expect that the relationship between the United States and Europe will thrive in the next four years.

Also, the recent developments on vaccine have made many people to price-in a recovery of the global recovery in the coming year. As a result, safe-haven assets like the US dollar and gold have struggled recently.

Swedish krona technical outlook

USD/SEK technical chart

On the weekly chart, we see that the USD/SEK has been on a steep decline since March. Subsequently, it has moved below the 61.8% Fibonacci retracement level and is now aiming for the 78.6% retracement at 8.386.

The pair has also moved below the bearish flag pattern that is shown in pink. The downward trend is also supported by the 25-week and 15-week weighted moving averages. The accumulation and distribution indicator is also falling.

Therefore, after the Riksbank decision today, I predict that the Swedish krona strength will continue for the next few weeks.