Unexpectedly Strong Swedish Inflation Prompts GBP/SEK Exchange Rate Slump
Demand for the Swedish Krona (SEK) surged in the wake of September’s consumer price index data, with the headline inflation rate beating forecasts to accelerate to 2.3%.
This unexpectedly strong showing encouraged SEK exchange rates to push sharply higher this morning as the odds of a Riksbank interest rate hike picked up.
Investors are betting on the prospect of rates rising as soon as December, with annual inflation having now held above the central bank’s 2% target since May.
As Riksbank Deputy Governor Cecilia Skingsley commented in the wake of the data:
‘We have now had a long period where we have fulfilled the target and we have inflation expectations that are anchored, so if the economy continues as we have forecast, there is scope for a gradually reduced monetary-policy expansion.’
With the Riskbank looking set to tighten monetary policy sooner rather than later the Pound Sterling to Swedish Krona (GBP/SEK) exchange rate came under significant pressure, slumping -1.65% on the day’s opening levels.
Swedish Krona (SEK) Vulnerable to Extended Stock Market Slump
An increasing sense of market wariness could see the Swedish Krona struggling to hold onto its bullish mood for long, however.
Global stock markets saw a sustained sell-off in the wake of the Trump administration’s latest criticism of the Federal Reserve and higher interest rates.
As the Fed looks set to continue tightening monetary policy in the months ahead and trade relations between the US and China remain tense stocks were pushed into a correction.
While this latest bout of market jitters was not enough to dent the gains of SEK exchange rates a sustained period of investor bearishness could still put the Krona under pressure.
GBP/SEK Exchange Rate Gains Limited Support from Brexit Speculation
As markets continued to speculate over the possibility of the UK and EU reaching an agreement over Brexit on Monday this limited the downside potential of Pound Sterling (GBP).
Reports that a number of Labour MPs are prepared to vote in support of Theresa May’s Brexit deal gave GBP exchange rates encouragement, boosting hopes of any agreement seeing smoother progress through Parliament.
However, this sense of renewed optimism remains fragile as some key issues apparently remain unresolved at this stage.
Unless a Brexit deal emerges next week the Pound looks vulnerable to another bout of selling pressure, with confidence in the outlook of the UK economy still muted.
Weaker UK Wages to Keep Up Pressure on Pound Sterling (GBP)
Ahead of next week’s UK labour market and inflation data the GBP/SEK exchange rate is likely to remain biased to the downside.
As forecasts point towards an easing in average weekly earnings in August the case for further Bank of England (BoE) policy action could diminish further.
In the absence of sustained wage growth the UK economy may struggle to recover further momentum in the months to come, limiting the appeal of the Pound.
While the BoE is expected to remain on hold ahead of the March 2019 Brexit deadline any signs that the central bank is likely to take a more cautious policy outlook may weigh heavily on the Pound Sterling to Swedish Krona (GBP/SEK) exchange rate.