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.

Considering monetary policy is set to diverge further, the USDSEK may rise to new multi-year highs before the end of 2016 on the back of the Federal Reserve. It remains to be seen, though, how long the trend will persist, especially when taking into account the Fed may not outline a time frame for further rate increases. If the language proves similar to statement content from a year earlier, the US dollar rally higher may quickly fade after the FOMC decision. Without a path forward established, markets may be quietly convinced that no more action on the monetary policy front is expected imminently, hurting US dollar strength and sending the USDSEK pair into a horizontal range.

Technically Speaking

For the better part of 2016, USDSEK has been trending higher in an equidistant channel formation. The channel pattern has a predominantly bullish bias, with any retreat towards the lower channel line presenting an ideal entry point for targeting the top of the channel. Bearish positions from the top of the channel run counter to the prevailing USDSEK trend higher and could see reward potential shrink dramatically. As such, the key level on the upside remains resistance at 9.3340 on the upside, with any break propelling the pair back towards heights last seen during the early 2000s. Furthermore, standing in the way of any dip in the pair are the moving averages.

The 50-day moving average has most recently withstood a downward test, with USDSEK bouncing back to the upside after reaching the level. An additional layer of support comes in the form of the 200-day moving average, which is currently trending higher below the price action. From a longer-term perspective, USDSEK managed to form an upside breakout from a downward trending channel pattern that lasted for nearly 22-months following the US election results. However, the move is looking increasingly overextended to the upside from the look of most momentum indicators.

Both the Stochastic Oscillator and Relative Strength Index are in overbought territory and beginning to retreat back below key thresholds. Based on the Fibonacci retracement levels, a pullback towards 8.9227 or even as low as 8.6879 would be feasible before a continuation of the uptrend. However, a dip below the 78.60% level and support at 8.3125 might raise the prospect of a reversal in the price action, sending USDSEK back towards the key psychological level at 8.0000.

Looking Ahead

The path of USDSEK largely depends on the outcome of this week’s Federal Reserve decision. While Swedish fundamentals continue to display broad-based improvements, especially on the inflationary front, no expectations of rising rates will continue to weigh on the Krona. By comparison, should the Federal Reserve raise rates without plans for future hikes, dollar upside may prove capped. Nevertheless, any further divergence in policy could send the USDSEK pair to new multi-year highs despite the risks of a near-term correction.