In a sign that policymakers are growing wary of Sweden’s ability to reach the 2.00% inflation target, the Riksbank has decided to expand its ongoing quantitative easing measures by adding purchases during the first half of 2017. The prospect of the Krona gaining ground versus the Euro amid the European Central Bank’s own extension of its asset purchase program has been enough to warrant an admission from Riksbank officials that further accommodation could be possible. Any strength in the local currency could harm efforts to reach the target as import costs fall amid a rising Krona.

While the immediate reaction to the development was strength in the Krona versus other major global currencies, the decision underscores the idea that fears of disinflation and deflation remain serious. In the case of Sweden, even the implementation of a negative interest rate environment has not been enough to reach inflation goals. Despite positive momentum in the arenas of employment and growth, it has become abundantly apparent that the yardstick by which the Central Bank measures success is growth in consumer prices during an especially challenging chapter for monetary policy.

Krona Strength Keeps a Lid on Inflation

After managing to kill off a bout of deflation through a combination of extremely loose monetary policy and asset purchases, the gains in inflation are proving insufficient to persuade policymakers that tightening may be around the corner. In its latest decision, the Swedish Riksbank has determined that the only way to reach the inflation target in Sweden is by adding SEK 30 billion in purchases while leaving open the option of dropping rates even further. According to a statement from the Executive Board, there is “still a high level of preparedness to make monetary policy more expansionary if the upward trend in inflation were to be threatened.”

One of the predominant causes behind policymakers’ palpable concerns is the recent strengthening of the Krona versus the Euro. Although the US dollar exchange rate is also important, it does not carry the same weight as the EURSEK rate. With the ECB expanding the money base and pressuring the EURSEK pair lower, it raises the threat of undoing some of the most recent consumer price gains. At present, Swedish CPI stands at 1.40% on an annualized basis as of November, climbing from the 1.20% reported in October. As a result, the decision to expand asset purchases through the first half of 2017 indicates that the USDSEK has further room to run to the upside as Central Bank officials use all the tools available to hit the inflation target.

Technically Speaking

Although the immediate aftermath of the latest easing decision was a weakening in the US dollar – Swedish Krona exchange rate relationship, the prevailing trend higher of the last few months remains largely intact and unlikely to change. Since August, USDSEK has been trending higher in a bullish equidistant channel formation. While the pair may be retreating at present towards the lower channel line, this could suggest an ideal entry point for bullish positions targeting the upper channel line. Acting as support against any prolonged downturn in the pair is the 50-day moving average, which is currently trending beneath the price action.

The previous test of this moving average back on December 9th proved incapable of breaking the level to the downside. Furthermore, it was not considered a breakout lower because there was no candlestick close outside of the prevailing channel. Should USDSEK fail to bounce from another retest of the 50-DMA, it could pave the way towards support and the 200-DMA on the downside. It is likely that USDSEK will continue to pullback modestly, especially after hitting the highest point since September of 2002 earlier this month following the massive rally in the US dollar.

Technical momentum indicators such as the Relative Strength Index and Stochastic Oscillator largely corroborate this viewpoint of an upcoming pullback from the most recent rally higher in USDSEK. With the RSI retreating back below the 70.0 overbought threshold and the Stochastic Oscillator experiencing a signal line crossover below the 80.0 threshold, indicators are aligning for a brief retreat in prices over the near-term. Nevertheless, it may not necessarily signal a reversal which would require a deeper downside move below the channel and the moving averages to be considered a change in trend, but rather just an interim correction preceding a trend continuation.

Looking Ahead

Even though the USDSEK may be undergoing a modest technical correction over the coming sessions, the prevailing trend higher is unlikely to be broken imminently as the Riksbank adds to its balance sheet while leaving rates at a record low -0.50%. With US rates forecast to rise several times throughout 2017, the outlook tilts heavily in favor of further gains for USDSEK over the medium-to-long term. While there may be several factors that could derail this outcome, the risk factors remain skewed to the upside as the Riksbank contemplates further accommodation.