Sweden’s Riksbank Rate Cut Cycle Nears Its End as Economy Shows Signs of Life

Economic

Summary:

Sweden's interest rate-sensitive economy was hit harder than most by the series of rate hikes in 2022/23. But following 150 basis points of rate cuts, the Riksbank's policy easing is showing early signs of bearing fruit.

We expect the Riksbank to cut rates twice more, including once this month

Sentiment indicators – be it consumer confidence, the purchasing managers indices, or the economic tendency survey – have shown steady improvement through 2024. The housing market is rebounding too. Remember that Sweden has a particularly high prevalence of variable-rate lending, which means that rate hikes hit more quickly than in countries, notably the US, where fixed-rate debt is more common. The same is true in reverse, and the swift delivery of rate cuts has boosted transactions, confidence and prices.

So far, that's not been widely reflected in the hard economic data. Unemployment is no longer rising but remains relatively high, settling structurally above the pre-Covid average. Household consumption bounced in November, though it's too early to say that this is the start of a trend.

In short, while the Riksbank is expecting a recovery in demand this year, it's still early days. Meanwhile, inflation has continued its recent tendency to undershoot Riksbank forecasts. CPIF excluding energy came in at 2% in December, below the Riksbank's most recent projection.

Add in the risks from US President Donald Trump’s trade war for Sweden’s relatively export-orientated economy, and we think there’s scope for both a cut next week and one more this year, ultimately taking the policy rate to 2%, slightly below the Riksbank’s forecast for the year.

Unemployment remains elevated

Sweden’s Riksbank Rate Cut Cycle Nears Its End as Economy Shows Signs of Life_1

Is a weaker SEK that undesirable?

Both historical and implied EUR/SEK have continued to plummet to 2021 levels, with markets struggling to find a catalyst for divergence. One reason is the relatively similar conclusions for the impact of US tariffs – where the krona would just follow the euro in depreciating against the dollar as it has done for the past couple of months. The other reason is that both the Riksbank and European Central Bank have conveyed a sense of predictability around the next policy moves.

Markets are pricing in around 20bp for this meeting, and we therefore see some upside potential for EUR/SEK next week and some signs of life in volatility. More importantly, the lingering uncertainty around global trade should keep the Riksbank leaning dovish. That should allow markets greater flexibility to price in additional cuts in Sweden based on the direction of Trump’s protectionism.

The Riksbank spent the past two years lamenting a weak currency, but the decline in inflation, focus on growth and risks of a shock to exports may well make the Riksbank more tolerant of fresh SEK depreciation.

All in all, we see some upside risks for EUR/SEK, which we could see move back to 11.60 on the back of greater market volatility in the first weeks of Trump’s presidency.

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Cohen

Economic

While maintaining balanced relations with Russia and China, the five states strengthened ties with Azerbaijan, Turkiye and the EU through major infrastructure initiatives like the Middle Corridor. Even amid domestic political challenges, Central Asian leaders are successfully navigating complex geopolitical currents while advancing economic integration.

In 2024, Central Asia enjoyed economic growth and avoided conflicts despite the ongoing war in nearby Ukraine. The year was characterised by frequent meetings of the five presidents in the now-established C5 pattern and by positive developments to improve East–West connectivity, with the European Union, China and multilateral development banks promising infrastructure funding for the Middle Corridor.

Political and economic cooperation in Central Asia intensified in 2024, especially in transport, trade and agriculture. The Asian Development Bank’s September 2024 Asian Development Outlook forecast GDP growth of 3.6 per cent in Kazakhstan, 6.3 per cent in the Kyrgyz Republic, 6.5 per cent in Tajikistan, 6.5 per cent in Turkmenistan and 6.0 per cent in Uzbekistan for 2024. Inflation was forecast between 5 and 10 per cent.

In 2024, regional diplomacy centred on the sixth annual Consultative Meeting of Heads of State of Central Asia, held in Astana in August. The annual Shanghai Cooperation Organisation summit was also held in Astana on 3–4 July. Bilateral C5+1 meetings included meetings with Indian Prime Minister Narendra Modi in January, Japan’s then-prime minister Fumio Kishida in August and German Chancellor Olaf Scholz in September. As UK foreign minister, David Cameron visited all five countries plus Mongolia in April.

Chinese President Xi Jinping visited Kazakhstan in July for the fifth time since 2012 — making Kazakhstan second only to Russia as the most visited destination on Xi’s presidential travels — where he reasserted support for Kazakhstan’s territorial integrity. President Xi went on to Dushanbe, where he highlighted the deepening relations between China and Tajikistan. On 30 March, senior ministers from the C5 and China launched the secretariat of the China–Central Asia cooperation mechanism in Xi’an.

Russian President Vladimir Putin also visited Central Asia, including a rare personal visit to Turkmenistan. But the sense is that Central Asia is exhibiting greater confidence as a middle power region. Neighbours remain powerful but Russia’s status as chief partner continues to diminish.

The head of state making the most visits to Central Asia was Azerbaijan’s President Ilham Aliyev. Addressing the C5 Summit in August 2024, Aliyev claimed it was his sixteenth visit to Central Asia since 2022. Azerbaijan has been cooperating especially with Kazakhstan and Uzbekistan in organising digital, pipeline and other cross-Caspian Sea links.

Closer relations with Azerbaijan are part of the Organization of Turkic States’ rebranding from a cultural association to a political, economic and security bloc. The Organization of Turkic States is composed of Turkiye, Azerbaijan, Kazakhstan, the Kyrgyz Republic and Uzbekistan as full members and Hungary, Turkmenistan and the Turkish Republic of Northern Cyprus as observers.

Central Asia’s most high-profile connections with Azerbaijan and Turkiye have been associated with the Middle Corridor rail link between Europe and China, which must pass through Azerbaijan if Russia and Iran are to be avoided. The European Bank for Reconstruction and Development estimated in 2023 that the total cost of improving infrastructure would be €18.5 billion (US$18.9 billion), investment sorely needed to improve the Central Trans-Caspian Network.

In 2024, the European Union took the lead in promising funding, organising stakeholder meetings and preparing feasibility studies for the key infrastructure projects in Central Asia. The World Bank, Asian Development Bank, Asian Infrastructure Investment Bank, Islamic Development Bank and various specialised agencies also worked on providing financial and technical assistance.

Since Russia’s invasion of Ukraine, China had been reluctant to actively promote the Middle Corridor routes, but this changed in 2024. Chinese investment in Georgia’s Anaklia deep sea port, the 27 December launch of the Kashi–Andijan railway, the China Railway Container Transport Corporation joining the Middle Corridor Multimodal joint venture and the revival of China–Afghanistan freight services all point to a more proactive position.

China has been especially active in Tajikistan, where fears of debt dependence have been expressed. Tajikistan’s domestic political situation was dominated after mid-2024 by an alleged coup, followed by a series of high-profile arrests. Some commentators question whether this was a genuine coup attempt or simply President Emomali Rahmon removing potential opponents to the presidential succession of his son, Rustam Emomali.

In December 2024, Tajikistan received a financing boost for the Rogun Dam when the World Bank approved a US$350 million grant. This was followed by a US$270 million loan from the Asian Infrastructure Investment Bank and a US$100 million Kuwaiti credit line. The economic benefits from the dam remain contested.

In the Kyrgyz Republic, there were reports of assassination attempts against President Sadyr Japarov and the head of the State Committee for National Security. The President dismissed prime minister Akylbek Japarov in December. Whether his dismissal was due to his corruption or due to his fight against corruption remains unclear.

Financing of the Kyrgyz portion of the Kashi–Andijan railway remained unclear in 2024, though some reports suggested the government was willing to accept a Chinese loan of US$2.35 billion to pay for the construction. The Kyrgyz Republic concluded an agreement with Kazakhstan and Uzbekistan to jointly finance the construction of the Kambarata dam. Estimated to cost US$5–6 billion, it will be the biggest dam in the Kyrgyz Republic and will help to address water management issues in the three countries.

The overall impression from 2024 is that Central Asian leaders are providing solid economic leadership and managing to balance political relationships with Russia, China, Europe and Turkiye amid potential instability in Afghanistan, Iran and Ukraine. In 2024, regional cooperation steadily improved and Central Asian economies were stable, two positive developments expected to continue in 2025.

Source：Eastasiaforum

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Michelle

Economic

Forex

The EUR/JPY cross extends the rally to near 163.05 during the early European trading hours on Thursday. The uptick of the cross is bolstered by the risk-on mood in the financial markets. Investors will closely monitor the Bank of Japan (BoJ) interest rate decision on Friday for fresh catalysts.

Traders have priced in a nearly 90% possibility that the Japanese central bank will raise interest rates from 0.25% to 0.50% at the end of the January 23-24 meeting, which would be the highest since the 2008 global financial crisis.

Technically, EUR/JPY keeps the bullish vibe on the 4-hour chart as the cross is well-supported above the key 100-period Exponential Moving Average (EMA). The upward momentum is supported by the Relative Strength Index (RSI), which stands above the midline near 58.05, indicating that the further upside looks favorable.

The first upside barrier for EUR/JPY emerges near 163.55, the upper boundary of the Bollinger Band. The next potential resistance level is seen at the 164.00 psychological level. Further north, the next hurdle to watch is 164.55, the high of January 5.

On the flip side, the initial support level for the cross is located at 162.32, the high of January 20. Any follow-through selling below the mentioned level could see a drop to 161.87, the 100-period EMA. The next contention level is seen at 160.96, the low of January 21.

Source: FXSTREET

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ING

Forex

USD: Corporate tax discussion in focus

Trump’s day two in office was dominated by the threat to reshape tax systems for multinational companies. As part of a memorandum originally published on Monday, the president is tasking the US Treasury with investigating discriminatory taxes on US citizens or corporations. Along with the floated possibility of withdrawing from the OECD agreement on a minimum corporate tax, the US is considering double taxation on some foreign individuals and companies established in the US. It is admittedly hard to draw conclusions on how tangible this threat is, or the implications for US and foreign corporations for now. It is likely another layer of uncertainty to which markets are getting accustomed.

On the hot tariff topic, the focus has remained on Canada and Mexico after Monday’s threat to impose 25% tariffs. After another round of dollar weakness in yesterday’s US session, CAD and MXN are now trading around 1% stronger compared to Friday. We read that as a signal that markets are still reluctant to price in the full extent of the tariff impact, and perhaps still hanging on to hopes that tariffs will be delayed further on the back of some cooperation on migration. For now, Canada has pledged to retaliate but outgoing Prime Minister Justin Trudeau has equally stressed that avoiding tariffs is the priority. Downside risks for both CAD and MXN remain elevated.

Today’s US calendar only includes the Leading Index and MBA mortgage applications, which in the week ending 10 January (published last week) jumped 33%, the highest since March 2020. We’ll see whether markets have the will take 10-year Treasury yields back to 4.50%, which can add to the dollar’s soft momentum. Our rates team remains bearish on UST beyond the very near term, and that fits our view that the dollar can withstand temporary positioning squeezes.

EUR: 1.050 would be stretch

For a second day in a row, EUR/USD got support from a dollar decline but fell short of the 1.0440 mark. There still seems to be some resistance to take the pair back to the 1.0450-1.050 mark, which would close the gap with its short-term fair value, that we currently estimate at 1.0580. In fact, 1.050 would mark a shift to essentially pricing out most of the Trump tariff risk on the eurozone. That is probably premature.

On domestic eurozone news, a number of European Central Bank members are speaking in Davos, including President Christine Lagarde, Francois Villeroy, Klaas Knot and Olli Rehn. Yesterday, Bundesbank governor Joachim Nagel confirmed the ECB should cut rates by 25bp next week and reiterated the widely shared view that more cuts can follow. He is generally considered among the most hawkish Governing Council members, and that was another signal there is no resistance left to the dovish front.

We expect today’s comments to follow the same line and markets to consolidate their expectations for four rate cuts by the ECB this year.

NZD: Inflation data paves the way for half-point cut

New Zealand released fourth quarter inflation figures overnight. Headline CPI was flat at 2.2% versus expectations for 2.1%, while the closely monitored non-tradable index slowed slightly faster than expected from 4.9% to 4.5%, the lowest level since the fourth quarter of 2021 and 0.2% below the Reserve Bank of New Zealand's November projections.

This set of figures paves the way for a 50bp RBNZ cut at the 19 February meeting, which markets are now fully pricing in. We expect that 50bp move to be followed by at least two more 25bp cuts to take rates to 3.25%, as the RBNZ is following the widespread shift in central banks to growth concerns and should be keen to frontload some easing.

In the short term, NZD/USD can find some support beyond the 0.570 mark as markets see the risks of US tariffs on China as tentatively lower. NZD was the biggest short in G10 according to latest CFTC positioning data, so the technical picture is supportive despite the recent rebound. Ultimately, Trump’s trade agenda will determine how far NZD/USD can recover. From a domestic perspective, the RBNZ should give little support to its currency.

CEE: Risk-on mood supports regional currencies

Today we will see the first data in the CEE region this week. In Poland, labour market and industrial production data for December will be published, and tomorrow we will see retail sales. December's set of real economy data should point to a continued, albeit gradual, recovery in the Polish economy. The year-on-year change in industrial production and retail sales is expected to be slightly stronger than in November amid a more favourable calendar (number of working days).

The EM market continues to rally after tariff headlines and switch to risk-on mode. CEE in particular had another good day yesterday, with the CZK outperforming its peers this time. EUR/CZK erased most of the gains after surprisingly low inflation last week and closed below 25.150, well below the Czech National Bank's forecast. We could hear from central bankers later this week ahead of the start of the blackout period on Thursday next week. We expect a dovish tone due to lower inflation, which should again push EUR/CZK higher. The current low levels could be attractive to the market ahead of the CNB meeting in February, where we expect a rate cut. Still, valuations point to a higher EUR/CZK around 25.350-400. We therefore see the current move as noise from the global environment and remain negative on the CZK.

EUR/PLN successfully closed yesterday below the key 4.250 level. Contrary to the CNB story, National Bank of Poland hawkishness should keep PLN supported as we discussed here earlier. While we also still see some dispersion between rates and FX here, we see current levels more fair compared to EUR/CZK. On the other hand, for a bigger move further down we would likely need to see more hawkish repricing in the rates market. Meanwhile, the market has resisted outpricing more cuts after the NBP press conference last week.

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Glendon

Economic

Forex

The USD/CHF pair struggles to capitalize on the previous day's modest bounce from the 0.9035-0.9030 area, or over a two-week low and oscillates in a narrow range during the Asian session on Thursday. Spot prices currently trade around the 0.9060 region, nearly unchanged for the day amid subdued US Dollar (USD) price action.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, struggles to capitalize on the overnight bounce from the monthly low amid bets that the Federal Reserve (Fed) will cut interest rates twice this year. That said, an uptick in the US Treasury bond yields acts as a tailwind for the buck, which, in turn, is seen lending support to the USD/CHF pair.

Meanwhile, Swiss National Bank (SNB) Chairman Martin Schlegel's ultra-dovish comments, opening doors for negative interest rates, might continue to weigh on the Swiss Franc. Apart from this, the underlying bullish tone around the equity markets could undermine the safe-haven CHF and further contribute to limiting any meaningful downside for the USD/CHF pair.

Traders also seem reluctant and might opt to wait on the sidelines ahead of US President Donald Trump's speech at the World Economic Forum for more concrete announcements on tariffs. This, in turn, could infuse volatility in the global financial markets and influence the USD price dynamics, which, in turn, should provide some meaningful impetus to the USD/CHF pair.

Traders on Thursday will further take cues from the release of the US Weekly Initial Jobless Claims data, due later during the early North American session. Nevertheless, the aforementioned fundamental backdrop warrants caution before positioning for an extension of the recent pullback from the 0.9200 mark, or the highest level since May 2024 touched earlier this month.

Source: FXSTREET

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Owen Li

Traders' Opinions

On January 22,ECBP resident Lagarde delivered her latest speech, with details as follows:

The European economy faces certain downside risks. While the ECB's policy adjustments aim to inject more vitality into the economy, current performance remains sluggish. However, gradual interest rate cuts are expected to provide a stable macroeconomic environment and bring more certainty to the market. Major challenges to European economic growth include energy price fluctuations, euro depreciation, and uncertainties in international trade. The potential threat of U.S. tariffs on European exports may further hinder export potential. Nevertheless, both the ECB and EU economic officials have stated they are prepared to address these external shocks and take measures to safeguard Europe’s economic interests.

Despite a slight uptick in inflation at the end of 2024, the ECB remains confident about achieving its 2% inflation target by 2025. Service sector inflation and wage growth remain key concerns, particularly the latter, which could trigger further price increases. However, the ECB is closely monitoring "lagging factors" such as services, energy, and wages to ensure price levels decline as expected. The ECB’s gradual rate-cutting strategy is also intended to address inflationary pressures while avoiding negative impacts on economic growth. In 2024, the ECB has implemented multiple rate cuts and plans to adjust the key rate closer to the neutral range in the future. This adjustment will provide more cushioning for the eurozone economy and reduce the risks of inflation fluctuations.

The low U.S. unemployment rate and near-full economic capacity are signs of an "overheated" economy, where protectionist trade policies could further push up costs and ultimately pass them on to consumers. In contrast, the European labor market remains relatively stable, though external shocks should not be underestimated. The healthy development of Europe's labor market is closely linked to timely policy adjustments. Currently, strong wage growth indicates high labor demand, supporting consumer spending and the overall economy. However, if this growth becomes uncontrolled, it may further exacerbate inflation. Thus, balancing job creation and wage growth control remains a key focus for the ECB.

Source：European Central Bank

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Cohen

Economic

India’s government is evaluating options ranging from a trade deal, cutting tariffs and importing more goods from the US if US President Donald Trump follows through with threatened trade action.

Officials in the Narendra Modi-led administration have sketched out various scenarios to counter any steps a new Trump administration may take to narrow India’s trade surplus with the US which was US$35.3 billion (RM156.6 billion) for the year ended March 31, people familiar with the matter said. The US was India’s largest trading partner for the period, data from India’s Commerce Ministry showed.

Among the options discussed, the government could buy more whiskey, steel and oil from the US, the people said, asking not to be identified as the talks are private. It could also reduce some import tariffs, with officials drawing up a list of likely products, such as bourbon whiskey and farm goods like pecan nuts, they said.

One of the proposals being considered is to reduce duties on good imported from US states that are politically important for the Republican party, one of the people said.

The plans under discussion are part of India’s larger strategy to avoid any confrontation with Trump, and also benefit from any potential US-China trade war, the people said. Bloomberg News reported on Tuesday that New Delhi is set to take back at least 18,000 illegal Indian immigrants from the US to help placate the Trump administration.

An email seeking comments from the Trade Ministry spokesperson was not immediately answered. The plans have not been finalised and are still under discussions, the people said.

On his first day in office on Monday, Trump said he would slap a 25% tariff on Mexico and Canada by Feb 1 while holding off on unveiling China-specific tariffs. He also threatened countries in the BRICS group of developing countries with increased tariffs.

Indian officials are also considering a limited trade deal with the US under one of its scenarios, people familiar with the matter said. New Delhi had tried unsuccessfully to implement this during the first Trump administration.

The plan under discussion would include reducing some “most-favoured nation” tariffs, which are imposed on countries with which India doesn’t have a bilateral trade deal.

Here are more details of the scenarios being discussed, according to people familiar with the matter:

India could consider buying more goods from the US in sectors including soybean, dairy, vehicles, medical instruments, and aircraft

Electronics, high-tech machinery, textiles, footwear and chemicals are among sectors to benefit if China is slapped with higher tariffs by the US and curbs on access to advanced technology

India expects the new Trump administration to pressure the country on issues including data regulations, intellectual property rules and e-commerce

Across the board tariffs of 10%-20% on all countries would help boost India’s exports of auto components and metals

Source: Theedgemarkets

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Sweden’s Riksbank Rate Cut Cycle Nears Its End as Economy Shows Signs of Life

We expect the Riksbank to cut rates twice more, including once this month

Unemployment remains elevated

Is a weaker SEK that undesirable?

Power Shifts and Progress in Central Asia

Source：Eastasiaforum

EUR/JPY Price Forecast: The Cross Keeps Bullish Vibe Above 163.00 Ahead of Boj Rate Decision

Source: FXSTREET

FX Daily: Tentative Tariff Optimism Keeps Dollar under Pressure

USD: Corporate tax discussion in focus

EUR: 1.050 would be stretch

NZD: Inflation data paves the way for half-point cut

CEE: Risk-on mood supports regional currencies

USD/CHF Consolidates Around 0.9060-0.9065 Area, Above Two-Week Low Set on Wednesday

Source: FXSTREET

ECB President Lagarde: Economic Growth Faces Downside Risks, Calls for Steady Progress

India's Modi Mulls Lower Tariffs, More Imports to Counter Trump’s Threats

Source: Theedgemarkets

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