Sweden’s inflation faces downside risk, will pressure SEK

After Riksbank stated that it will intervene on the FX markets if required, the EUR-SEK has been trading above the 9.20 mark. The pair is expected to have separated from global risk aversion and the main role is now being played mostly by regional factors.  Liquidity in SEK continues to remain very low. However, this argument is not enough to set off SEK sales in relation to increasing risk aversion, mainly if the risk is contained to the Emerging Markets and China.

At present domestic or regional factors will have a crucial role. Riksbank is compelled to follow the monetary policy of ECB and become more expansionary in order to avert the renewed move towards deflation.

The December inflation data for Sweden will be released today and is relevant against the on-going drop in oil prices, and unexpected fall of the euro area and Germany inflation rates. This indicates that the Sweden's inflation data faces a downside risk, which will pressurise the SEK and the central bank for additional expansionary measures. Hence, the EUR-SEK pair is expected to see an upward movement.