Goldman Sachs: Opposing Forces

Goldman Sachs note that “better European growth news has pushed EUR/USD higher, and we have previously highlighted that SEK operates as a kind of ‘Euro-squared’ such that when EUR appreciates, SEK appreciates by even more.”

• “However, developments in the domestic economy are more nuanced. On the one hand, house prices have fallen sharply, and November activity data was weak, which triggered a move higher in EUR/SEK.”
• “On the other hand, SEK strengthened in response to Friday’s strong inflation print.”
• “In other countries, we have found that the net effect on the currency depends on how the central bank responds to the mixed domestic outlook. To that end, meaningfully higher policy rate forecasts in the February monetary policy report (our economists see upside risk to their 3¼% terminal rate forecast - while the current Riksbank forecast is below 3%) could push SEK stronger.”
• “Given an improving European growth outlook and our expectations for tighter monetary policy in Sweden, we think EUR/SEK has moved too far over the last month and expect it to retreat to SEK11.20 over the next three months.”