Unexpectedly Hawkish Riksbank Boosts Swedish Krona (SEK) Demand
The mood towards the Swedish Krona (SEK) improved as the Riksbank defied the general mood of central banks around the world, sticking to its hawkish policy outlook.
With Swedish policymakers leaving their interest rate projections unchanged, remaining on track to raise interest rates around the end of 2019 or in early 2020, SEK exchange rates found a fresh boost.
Even so, as both the Federal Reserve and the European Central Bank (ECB) have shifted towards a more dovish policy bias in recent months the likelihood of an imminent Riksbank interest rate hike remains limited.
As markets were relieved that the central bank had not altered its outlook just yet, however, this kept the Pound Sterling to Swedish Krona (GBP/SEK) exchange rate on the back foot.
Pound Sterling Swedish Krona (GBP/SEK) Exchange Rate Slides as UK Service Sector Stalls
An underwhelming UK services PMI put additional pressure on Pound Sterling (GBP), meanwhile, as the index missed forecasts in June.
While investors had expected a modest improvement on the month the headline index instead slowed to a state of near-stagnation at just 50.1, undermining confidence in the economic outlook.
This weak showing suggests that the impact of recent Brexit-based uncertainty and political anxiety have dragged on the service sector, paving the way for a lacklustre second quarter gross domestic product.
Pound Sterling naturally softened in the wake of the data, with the economy looking set to remain under pressure thanks to the persistent risk of a no-deal Brexit being threatened by both Conservative leadership candidates.
Worries Over UK Economic Outlook Set to Limit GBP Exchange Rate Support
The weaker nature of all three of June’s UK PMIs suggests that the economy is on course to lose further momentum in the second quarter, reflecting the ongoing disruption from Brexit worries.
As analysts at Capital Economics noted:
‘A shift in activity to before the Brexit date [29th March] accounts for some of the weakness. But the fact the surveys have not picked up towards the end of the quarter, and global manufacturing is slowing, means the risk is that the economy fails to bounce back in Q3.’
If Boris Johnson and Jeremy Hunt continue to hang the threat of a no-deal Brexit over the economy any improvement in demand for the Pound appears unlikely.
Unless markets see reason to bet on the prospect of the UK’s next prime minister taking a softer approach to Brexit the GBP/SEK exchange rate looks set to remain biased to the downside.
Weakening Industrial Production May Knock Back Swedish Krona (SEK)
SEK exchange rates could lose some of their bullish momentum ahead of the weekend, however, as forecasts point towards weaker industrial production figures.
Signs that production contracted on the month in May would undermine confidence in the outlook of the Swedish economy, limiting the potential for a Riksbank interest rate hike.
With global growth momentum continuing to show signs of easing any weakness within the Swedish industrial sector here could lead towards further losses in the months ahead.
However, if production shows fresh signs of resilience in the face of global trade tensions and weakening demand the GBP/SEK exchange rate may shed further ground.