UBS sees upside risks for the EUR/SEK pair

The Swedish krona weakened against the euro after the Riksbank unexpectedly cut interest rates by 25 basis points and signaled further easing, reversing its previous stance. UBS analysts believe the krona's weakness is temporary, projecting a decline in the EUR/SEK pair to 10.50 next year, supported by repatriation of foreign assets and potential resolution of EU-US trade tensions. However, escalating trade wars and a European recession pose upside risks to the EUR/SEK, potentially pushing it back to 11.50.

Analysis

The Swedish krona depreciated against the euro following an unexpected 25 basis point interest rate cut by the Riksbank, which also signaled potential for further monetary easing, directly contradicting its March guidance that suggested an end to the current easing cycle. This policy shift by the Riksbank is a response to slowing domestic growth momentum and elevated trade uncertainty. Despite this immediate pressure on the krona, UBS analysts project the currency's weakness to be temporary, forecasting the EUR/SEK pair to trend downwards towards 10.50 next year. This outlook is predicated on Sweden's favorable positioning for asset repatriation and a potential resolution of EU-US trade frictions, crucial for its open economy, which could also support the Riksbank's revised growth forecasts. Nevertheless, the global environment presents notable headwinds, including rising geopolitical risks, higher energy prices, and trade policy volatility, which create upside risks for EUR/SEK. UBS identifies key technical levels with resistance around 11.20 and support near 10.70, cautioning that an escalation in trade wars or a European recession could push EUR/SEK towards 11.50, reflecting the prevailing market uncertainty.

Key Decisions for Investors

• Investors should factor in the Riksbank's unexpected dovish turn, which implies continued near-term pressure on the Swedish krona, potentially warranting a cautious stance on short-term SEK long positions.
• Consider the longer-term potential for SEK appreciation as forecasted by UBS (EUR/SEK towards 10.50), contingent on asset repatriation and favorable trade developments, while actively monitoring the identified upside risk scenario of EUR/SEK moving to 11.50 if trade wars escalate or a European recession materializes.
• Pay close attention to upcoming Swedish economic data, Riksbank communications for further signals on the easing cycle, and shifts in the global trade and geopolitical landscape, as these will be critical determinants for the krona's trajectory against the euro.