USD/SEK At Critical Point Heading Into The Fed Decision

Record low interest rates in Sweden have supported an ongoing recovery in many of the nation’s most important fundamental metrics. Extreme monetary policy measures have spurred tremendous gains in inflation, which is reaching back towards the Central Bank’s target while growth remains in positive territory and unemployment gradually falls. However, the largely positive backdrop has failed to spur any gains in the Swedish Krona as the focus shifts to the US dollar following Donald Trump’s election victory and the upcoming FOMC decision.

The furious rally in the US dollar over the last month since the election votes were tallied has left no stone unturned, with the USDSEK experiencing these very tailwinds. As a result, USDSEK has risen to a multi-year high, driven by dollar momentum as financial markets cautiously await the results of Wednesday’s interest rate decision and Fed statement. Any hints about the future of policy that are considered hawkish could breathe new life into the rally whereas a dovish rate hike could prove problematic for the dollar, reversing recent gains in the US currency.

All Eyes Trained on the Fed

With Wednesday’s FOMC meeting rapidly approaching, financial markets are thoroughly prepared for a rate hike after significant hawkish chatter from key Federal Reserve officials. Furthermore, markets are pricing in a 93.20% probability of an increase to 0.75% according to Fed Funds futures. However, this development has largely been priced-in for USDSEK. The lingering question that remains is the pace of additional tightening of policy for 2017. While financial markets are currently not pricing in the Fed lifting rates more than twice during the upcoming year, rising inflation and faster growth could presage quicker action.

However, the United States is not alone when it comes to experiencing a swift uptick in fundamentals. Data released earlier on Tuesday showed that Swedish inflation rose to the highest point since March of 2012, printing at 1.40%. While still shy of the 2.00% targeted by the Riksbank, the figure is evidence of growing momentum in the economy thanks to negative interest rates which are currently standing at -0.50%. Nevertheless, stable growth and falling unemployment are not projected to lead the Swedish Central Bank towards any near-term rate increases. At present, no rate hike is anticipated before the third quarter of 2017, when a 25 basis point step higher to -0.25% is expected.

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