USD/SEK Stumbles As Rising Swedish Inflation Beckons Eventual Tightening

Although most of the attention being paid by markets centers on the upcoming FOMC decision due for release on Wednesday, the European dynamic has been dominated by inflationary data from across the continent.The latest data from Sweden in particular mirrors similar dynamics unfolding across the globe as resurgent energy prices help spur higher consumer prices.Although the Swedish Riksbank remains cautious towards the outlook, these figures suggest that the Central Bank will gradually be able to ease away from highly accommodative monetary policies.

However, despite the progress on the inflationary front, the major risk factor of fluctuating exchange rates will likely hold the Riksbank back from imminent action.Any swift appreciation in the currency on the back of promising economic data may even spur the Central Bank to intervene directly in exchange markets to avoid any inflationary shocks.Moreover, with no expectation of inflation stabilizing at 2.00% until 2018, the USDSEK pair may only have one direction to trend over the medium-term as the distance between Swedish and US rates widens further.

Swedish Inflation Gains Send Krona Higher

A growing body of evidence is pointing to enduring gains in inflation across the globe as the base effect of low energy prices gradually subsides.In the case of Sweden, headline annualized inflation figures measured through the end of February rose to 1.80% from the 1.40% reported a month earlier, reaching the fastest pace of price gains since February of 2012.The predominant drivers of these gains were rising transportation costs (4.90%), increased housing and utilities prices (2.60%), and food and beverages (2.10%).Although the figure remains shy of the Riksbank’s target of 2.00% inflation, the data nevertheless shows that the trend is generally positive for inflation.

While optimistic on a headline basis, it may complicate the outlook for policymakers attempting to keep a lid on Krona strength.Although they have been able so far to prevent any measurable appreciation that may negatively impact the advance in the nation’s economic fundamentals, the Riksbank has promised that they will maintain accommodative measures including negative interest rates and quantitative easing.Furthermore, the last interest rate decision also saw Central Bank officials highlight their readiness to intervene in currency markets to prevent a speculative appreciation in the Krona.Thus, the risk factors for USDSEK remain largely to the upside over the medium-term.

Despite their preparedness to intervene, the Riksbank may find some relief later this week if the US Federal Reserve opts to raise interest rates while promising a gradual pace of tightening over the coming months.Should this development transpire at the conclusion of the two-day FOMC Meeting on Wednesday, the US dollar may be poised to alleviate the pressure on the Krona, sending USDSEK back towards multi-year highs reached towards the end of 2016.However, absent such a development, the Riksbank may be forced to reevaluate its position on intervening in exchange markets to keep the Krona competitive over the medium-to-long term.

Krona Advances on Back of Prices Pickup

Since breaking out of an upward trending equidistant channel that had been forming at the end of January, USDSEK has found support at the 50-day moving average, which is currently trending beneath the price action.At this point, any candlestick close below the 50-DMA level opens the door towards support from the 200-DMA which has risen to approximately 8.8000.However, there are signs that the price action is modestly oversold.The Stochastic Oscillator, which is a momentum indicator, has fallen below the 20.0 threshold which indicates that price momentum may have overshot its target.Should the %K and %D lines cross back to the upside above the threshold, it could be an early sign of trend continuation for the prevailing longer-term uptrend.In this case, the next target would be December highs near 9.4500.

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What Binary Options Traders Should Watch For

The major event that could stoke the greatest amount of volatility in the USDSEK pair near-term is the upcoming FOMC decision set to be released on Wednesday.A move by the US Federal Reserve to raise interest rates could have widespread implications not just near-term, but also longer-term with respect to USD momentum.Any statement that provides a clearer outlook for monetary policy, may also spur upside in USDSEK.Apart from the FOMC, the next major data due from Sweden is not set to be unveiled until mid-to-late April in the form of inflation, unemployment, and a monetary policy decision.With rates in the US and Sweden only likely to diverge further, the result is a balance of risks skewed firmly upwards over the medium-term when it comes to USDSEK.