Sweden’s Riksbank is expected to keep the policy rate unchanged at 1.75% for a seventh consecutive meeting, while maintaining scope to raise rates later this year as inflation runs above the central bank’s own projections. July CPIF inflation printed at 0.7% year on year versus a 0.5% forecast, and CPIF ex-energy came in at 0.6% compared with a 0.2% projection.
Even so, inflation remains below the 2% target, which tempers the case for a more hawkish shift in expectations and leaves the Swedish krona facing a policy headwind. In rates markets, the swaps curve continues to fully price a 25 basis point increase, which would take the policy rate to 2.00% in December.
SEK Strategy Recommendations
We recommend that derivative traders position for a weaker Swedish Krona (SEK) in the coming weeks by buying EUR/SEK call options or shorting SEK futures ahead of Thursday’s Riksbank meeting. While the central bank is expected to hold its policy rate at 1.75% for the seventh consecutive meeting, any hawkish rhetoric is unlikely to spark a lasting currency rally. This cautious policy stance creates a persistent headwind for the Krona, especially as global interest rate differentials continue to work against Sweden.
Macro Backdrop and Krona Outlook
Although July’s CPIF inflation ticked up to 0.7% against the projected 0.5%, it remains critically below the Riksbank’s official 2% target. The swaps market is currently pricing in a full 25-basis-point rate hike to 2.00% by December, which we believe is overly optimistic. With core inflation (excluding energy) sitting at just 0.6%, the central bank has very little incentive to rush into actual tightening.
Sweden’s sluggish economic backdrop supports our bearish view, with domestic retail sales recently dipping and Sweden’s unemployment rate hovering near 8.3%. Historically, when the Riksbank pauses during periods of low inflation, the Krona tends to underperform its peers, and we expect EUR/SEK to rise toward the 11.45 level in the near term. This makes short-term SEK put options an attractive play for volatility traders looking to capitalize on the central bank’s limited room for maneuver.
