Swedish Inflation Gains on Advantageous Policy Backdrop

The Swedish economy continues to book gains on the back of accommodative monetary policy measures as the benefits of ultra-low interest rates and asset purchases deliver results.The latest inflation figures highlight this impact, with consumer prices climbing by the fastest pace in years, helping improve the prospect of raising interest rates and gradually removing accommodation.The resulting gains in the Swedish Krona have been fairly swift, with the possibility of policy tightening helping to spur additional upside in the Swedish currency while pushing the USD/SEK pair lower.

Record Low Rates and Purchases Help Spur Price Gains

In an effort to meet the ambitious 2.00% inflation target, the Swedish Riksbank has taken extreme measures to get the consumer price figure back on track.Between a combination of record low interest rates which currently sit at -0.50% and an additional SEK 30 billion in asset purchases set to be concluded during the first half of the year, the backdrop for the economy remains overwhelming positive.Besides an attractive borrowing environment, growth in the economy is broadly positive, with annualized growth printing at a 2.80% expansionary pace through the end of the third quarter.With interest rates unlikely to move up quickly, the accommodative monetary policy environment is likely to continue to spur gains in economic activity.

The most obvious benefit of these easy policy measures has been a weaker Krona and an environment where spending trumps saving. The weaker the Krona gets, the more expensive imports become, a cost that importers later pass along to producers and eventually consumers, raising the prices for a basket of goods and services.However, the biggest benefit of negative rates is that savers are penalized for holding their money in banks instead of spending.As a result, negative interest rates can have a positive impact on the investment environment by forcing businesses and individuals to invest and spend instead of hoarding cash in bank accounts.The increased economic velocity that results is broadly positive for inflation, helping to drive the measure to 1.70% on an annualized basis through the end of December.

Krona Climbs on Tightening Outlook

Now that inflation is closing in on the Riksbank’s 2.00% target, the tantalizing prospect of an end to a period of record low interest rates and unconventional support in the form of asset purchases has already seen the Swedish Krona benefit. After reaching the lowest point against the US dollar since 2002, the Krona has staged a magnificent rebound, climbing over 5.00% versus its US counterpart since hitting lows in December. Part of the momentum can be attributed to profit-taking in the US dollar as uncertainty blurs the outlook for the US economy amid limited details about proposed fiscal policy measures.Nevertheless, efforts by the Federal Reserve to raise interest rates might undo some recent Krona gains unless the moves are matched by the Riksbank.

From a more technical perspective, the bigger development is the breakout from a multi-month channel.Channel-based breakouts are classically among the most volatile and considered the best from a potential reward perspective.The signs that confirm this is not a fake move but rather a breakout include higher-than-average trading volumes in the USDSEK pair.Furthermore, should the daily candlestick close outside the channel, it suggests the breakout is real.While ideally, bearish positions should be initiated near the lower channel line, USDSEK may experience a modest rebound before resuming the reversal lower.

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With momentum indicators such as the Relative Strength Index and Stochastic Oscillator trending in or near oversold territory, the USDSEK pair may be poised for an upside pullback before resuming the near-term downward trend.Standing in the way of any deeper retreat is also the 200-day moving average which is trending higher below the price action and acting as support.Therefore, any sustained downward momentum from the breakout move will be dependent on crossing below this level over the medium-term if the trend low is to last.

What Binary Options Traders Should Watch For

Looking ahead, the next major fundamental events that will impact the USDSEK pair’s trajectory are the forthcoming central bank decisions from the US Federal Reserve and the Riksbank.The US Federal Reserve is set to act first with the Federal Open Market Committee slated to publish its monetary policy decision on February 1st.No changes are expected for rates, although any hint of an accelerated time line for normalizing interest rates throughout the course of 2017 could reverse the most recent US dollar selloff, pushing the USDSEK pair back towards multi-year highs.

For Sweden, the next interest rate decision will be delivered on February 15th, with no changes forecast.The important development from the event will be the outlook for rates and whether asset purchases will be tapered in response to higher inflation. With the next inflation report due just days later, any further climb towards 2.00% could set the stage for a period of rate hikes to begin, aiding in any Krona appreciation near-term. All told, the risk factors remain to the downside for USDSEK over the near-term, however, the outlook will remain mixed as policy unfolds over the coming months.