Should you buy or sell the Swedish krona as it drops to a record low against the euro?

Given the euro area’s challenges, the European common currency (EUR) is remarkably resilient. It trades at 1.09 against the US dollar and gains ground against other rival currencies.

In some specific cases, the euro’s strength is even more impressive. For instance, the euro rose to a record high against the Swedish krona.

In some cases, the EUR strength is relatively recent (e.g., EUR/USD moved higher as last week the European Central Bank‘s decision and press conference were viewed as hawkish by markets). But in some other cases, the common currency’s strength goes way back in time, as with the EUR/SEK exchange rate.

So what can one expect from the EUR/SEK exchange rate as it trades at record-high levels?

Swedish inflation is coming down quickly

One of the explanations for the EUR/SEK exchange rate to move at record levels is the interest rate differential between the two central banks – the Sveriges Riksbank and the European Central Bank (ECB).

In Sweden, the Sveriges Riskbank has lifted the interest rate to 3.5%, while in Europe is higher. Moreover, the ECB  pledged to keep raising rates in July, too, while in Sweden, the likelihood is that the central bank will not hike again.

Inflation is the reason. More precisely, inflation in Sweden is coming down nicely from its highs.

Even though it remains well above the 2% target set by the central bank, it is worth mentioning that the Sveriges Riksbank focuses on the CPIF metric. This is the consumer price index with a fixed interest rate. The reason is that the CPIF is not affected by household mortgage rate changes, thus being favored by the central bank.

Using this metric, inflation was at 6.7% in May, down from 7.6% in April.

EUR/SEK overcomes dynamic resistance

The EUR/SEK exchange rate just broke above the dynamic resistance given by the upper edge of a rising channel. This is a bullish development.

Moreover, before the breakout, it formed a bullish flag, a continuation pattern. Therefore, shorting the EUR/SEK here is risky. Ideally, bears should wait for the market to break the series of higher lows before initiating a short position. Even better, wait for a move below the lower edge of the channel.

All in all, EUR/SEK is in a bullish trend. Fighting it should be only for the brave ones.

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