Although most of the attention being paid by markets centers on the upcoming FOMC decision due for release on Wednesday, the European dynamic has been dominated by inflationary data from across the continent.The latest data from Sweden in particular mirrors similar dynamics unfolding across the globe as resurgent energy prices help spur higher consumer prices.Although the Swedish Riksbank remains cautious towards the outlook, these figures suggest that the Central Bank will gradually be able to ease away from highly accommodative monetary policies.

However, despite the progress on the inflationary front, the major risk factor of fluctuating exchange rates will likely hold the Riksbank back from imminent action.Any swift appreciation in the currency on the back of promising economic data may even spur the Central Bank to intervene directly in exchange markets to avoid any inflationary shocks.Moreover, with no expectation of inflation stabilizing at 2.00% until 2018, the USDSEK pair may only have one direction to trend over the medium-term as the distance between Swedish and US rates widens further.

Swedish Inflation Gains Send Krona Higher

A growing body of evidence is pointing to enduring gains in inflation across the globe as the base effect of low energy prices gradually subsides.In the case of Sweden, headline annualized inflation figures measured through the end of February rose to 1.80% from the 1.40% reported a month earlier, reaching the fastest pace of price gains since February of 2012.The predominant drivers of these gains were rising transportation costs (4.90%), increased housing and utilities prices (2.60%), and food and beverages (2.10%).Although the figure remains shy of the Riksbank’s target of 2.00% inflation, the data nevertheless shows that the trend is generally positive for inflation.

While optimistic on a headline basis, it may complicate the outlook for policymakers attempting to keep a lid on Krona strength.Although they have been able so far to prevent any measurable appreciation that may negatively impact the advance in the nation’s economic fundamentals, the Riksbank has promised that they will maintain accommodative measures including negative interest rates and quantitative easing.Furthermore, the last interest rate decision also saw Central Bank officials highlight their readiness to intervene in currency markets to prevent a speculative appreciation in the Krona.Thus, the risk factors for USDSEK remain largely to the upside over the medium-term.