USD/SEK starts bullish reversal as Riksbank changes forex strategy

Written by: Crispus Nyaga
January 15, 2021
  • The USD/SEK pair has started a bullish reversal.
  • This week, the Riksbank announced that it would start boosting its foreign reserves.
  • This is seen as a strategy to weaken the Swedish krona

The USD/SEK is on track for its second straight week as traders reacted to the decision by Riksbank to start revamping its foreign reserves. It is also rising even after the relatively strong inflation data from Sweden.

Sweden inflation data

Consumer prices rose in December as the country continued to deal with new coronavirus cases. According to the Swedish statistics bureau, the headline consumer price index (CPI) rose by 0.7% in December. This was a better reading than the previous month’s decline of 0.1%. The CPI increased by 0.5% on an annualised basis.

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In the same month, the CPI at constant interest rates increased by 0.7% leading to an annualised increase of 0.5%. Economists polled by Reuters were expecting the data to show an increase of 0.6% and 0.2%, respectively. These numbers are still below the overall Riksbank’s target of 2.0%. 

Still, the biggest catalyst for the USD/SEK is this week’s decision by Riksbank to revamp its foreign reserves. Analysts and participants in most forex brokers were caught off-guard by the new strategy. Most of them believe that it is intended to cap the recent strength of the Swedish krona. In a note, an analyst at Handelsbanken said:

“Regardless of the official picture, it is difficult to depart from the fact that the decision comes very quickly at a stage when the Riksbank’s executive board has expressed concern about the rapidly rising krona exchange rate.”

The USD/SEK is also rising because many forex participants believe that the Swedish krona was getting overvalued and overbought. That’s partly because the Swedish krona was the best-performing currency in the G-10 last year. Today, as shown below, the situation has changed.

G10 currencies against euro
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USD/SEK technical outlook

USD/SEK
USD/SEK technical chart

On the weekly chart, we see that the USD/SEK pair has been on a sharp downward trend. In fact, it has declined by more than 20% from its highest point last year. It has also moved below the 50-week and 25-week moving averages. However, this week, there are signs of a reversal. The Relative Strength Index (RSI) has started to rise while the pair has formed a relatively small hammer pattern. Therefore, there is a likelihood that the pair will resume the upward trend and possibly test the 61.8% retracement at 8.8277.