Swedish Krona Hits 5-Month High Vs Euro; Rally Could Be Short-Lived — Market Talk

The Swedish krona would be one of the biggest beneficiaries of any progress towards a Ukraine ceasefire deal, J.P. Morgan analysts say in a note. The krona's valuation is cheap and it's sensitive to risk sentiment, they say. It's also supported by the potential for Swedish fiscal stimulus and the Riksbank ending its interest-rate cutting cycle. A Ukraine peace deal would provide more relief to the krona compared to the Norwegian krone where the prospect of lower gas prices could impact its terms of trade. J.P. Morgan expects EUR/SEK to fall to 11.00 in the case of a definite resolution. EUR/SEK trades flat at 11.2290, having earlier reached a 20-week low of 11.2112, according to FactSet. (renae.dyer@wsj.com)

The Swedish krona and Norwegian krone could extend recent gains on growing optimism about a potential ceasefire deal for the Russia-Ukraine conflict, ING analyst Chris Turner says in a note. "Expectations are that the U.S. will reveal more of its plans at a Munich security conference this weekend, although any breakthrough with Russia would be a major surprise and is not priced in FX markets," he says. In the near-term, EUR/SEK could fall to 11.15 and EUR/NOK could fall below 11.50, with the NOK also supported by a rise in energy prices. EUR/SEK falls 0.2% to a four-and-a-half-month low of 11.2388, according to FactSet. EUR/NOK rises 0.2% to 11.5827 after reaching a two-and-a-half-month low of 11.5337 on Monday. (renae.dyer@wsj.com)

remains offered as the weekend announcement over steel tariffs was the first to hit the European Union, said ING.

The EU is now bracing for other sectors, such as autos, to be tariffed, wrote the bank in a note. There is little justification for the EU bloc to be hit with reciprocal tariffs since the EU tariff regime is relatively low.

However, presumably, European politicians are more fearful about broader tariffs in April once the U.S. Commerce Department delivers its report on why the U.S. runs large trade deficits.

Whatever Tuesday's news on tariffs, wide rate spreads justify continuing to trade near 1.03 and undermine the need for any corrective bounce, wrote ING in a note.

The decoupling of the eurozone from U.S. rate spreads can see differentials stay wide, if not move wider over the coming months. Combined with rising natural gas prices, expect to stay offered, stated the bank. A decline towards the 1.0250/60 range, or potentially lower, seems probable ahead of the new tariffs.

Even though is range-bound, ING us starting to see some decent moves lower in and . In , two-year swap differentials have moved in favor of Sweden's krona (SK) as the European Central Bank is priced for another 88bps of easing this year, while the Riksbank is barely expected to cut once.

But the story seems larger than rate differentials, and like its Central and Eastern European (CEE) peers, the krona is shaking off the rise in gas prices. This resilience may be driven by growing optimism about a potential ceasefire deal in Ukraine, pointed out ING. Expectations are that the U.S. will reveal more of its plans at a Munich security conference this weekend - although any breakthrough with Russia would be a major surprise and is not priced in FX markets.

For now, however, can drift down to the 11.15 area. And Norway, benefiting hugely from the rise in energy prices, can see test and possibly break 11.50.

Former United Kingdom Bank of England Monetary Policy Committee arch-hawk and now arch-dove, Catherine Mann, speaks at 930 a.m.CET on Tuesday. ING is all interested to hear why she flipped her voting intentions at last week's BoE meeting.

An interview given by Mann to the Financial Times published Tuesday looks to largely have answered that question, added the bank. Her concern is that demand conditions are weakening, corporate pricing power is fading and there is a risk of a 'non-linear' drop in employment.

Further comments along those lines on Tuesday could see the markets firm up pricing of three further 25bps BoE cuts this year. Currently the market prices just 66bp. ING thinks is more vulnerable than , however.

This is because the euro could (EUR) get hit should the U.S. turn its attention to the EU auto sector. 1.2250 looks like the near-term target for .

The opening of the week was positive for the CEE region, added ING. Speculation about peace talks between Ukraine and Russia is filtering through to the markets regardless of the details of a possible deal.

As such, the CEE market can ignore a stronger US dollar (USD) or higher gas prices or threats of trade wars. Long positioning has been building in Poland's zloty (PLN) and Hungary's Forint (HUF) in particular for some time now so ING doesn't like to chase this rally, but for now, nothing prevents EUR-crosses going a little lower.

This should also have a positive impact on fixed-income assets where the bank can see a decent rally as well despite the negative fiscal policy picture and heavy bond issuance. The key will be the weekend security conference in Munich, which could reveal how close the sides are to some first realistic draft agreement, deciding on further direction for CEE markets.

The latest Market Talks covering FX and Fixed Income. Published exclusively on Dow Jones Newswires throughout the day.

0902 GMT - The Swedish krona briefly falls after the Riksbank cut interest rates by 25 basis points to 2.25% as expected and refused to rule out further cuts. Sweden's central bank said its previous guidance to cut rates once more in the first half of 2025 essentially stands but it is "prepared to act if the outlook for inflation and economic activity changes." Several factors could affect economic developments and the policy rate going forward, it said. The Riskbank pointed to global uncertainties including U.S. and Europe fiscal policies and geopolitical tensions. It also highlighted risks related to the Swedish economy's recovery and the krona. EUR/SEK trades at 11.4690, little changed from levels before the decision, after briefly rising to 11.4805. (renae.dyer@wsj.com)

0839 GMT - The euro has limited scope to rise given the threat of universal trade tariffs from U.S. President Trump, ING's Francesco Pesole says in a note. Trump said Monday that he wanted across-the-board tariffs that are "much bigger" than 2.5%. The risk premium on the euro versus the dollar is consistent with the resurging risk of tariffs, Pesole says. Confirmation that the U.S. Treasury is actively laying out plans for tariff implementation should prevent that risk premium gap from being closed, he says. "We don't expect [the euro] to trade much further from the current spot [against the dollar] by the end of the week." The euro falls 0.1% to $1.0425. (renae.dyer@wsj.com)

0838 GMT - Yields on U.K. government bonds or gilts, decline, along with eurozone government bond yields ahead of major central banks' rate decisions this week. The Federal Reserve is expected to keep interest rates on hold at Wednesday's rate announcement while the European Central Bank is likely to cut rates by 25 basis points on Thursday. "[Investors] look forward to monetary policy updates from the Federal Reserve and the European Central Bank for further direction," Tickmill Group's Patrick Munnelly says in a note. The 10-year gilt yield falls 3bps to last trade at 4.580%, Tradeweb data shows. The 10-year Bund yield declines 2bps to 2.542%. (miriam.mukuru@wsj.com)

0838 GMT - The Spanish economy can keep growing apace thanks to an energetic workforce and continued arrivals of tourists, Capital Economics' Adrian Prettejohn writes in a note to clients. Gross domestic product expanded 0.8% in the year's final quarter, allowing the Iberian nation to book a strong 3.2% annual increase, figures show Wednesday. A tight labor market, boosted by immigration, should keep household incomes rising, while lower interest rates in the eurozone will further boost consumption, Prettejohn says. "We think the [Spanish] economy will once again grow by around 3%" in 2025, he says.(joshua.kirby@wsj.com; @joshualeokirby)

0812 GMT - The Canadian dollar could fall further as the Bank of Canada is likely to refrain from any signals about nearing the end of its interest rate cutting cycle in a decision later, ING's Francesco Pesole says in a note. The BOC is widely expected to cut rates by 25 basis points, and hence the focus is on guidance about future decisions, he says. Given the risk of the Trump administration imposing tariffs on Canada, the BOC will likely "err on the dovish side" by favoring further rate cuts. "This means there are mostly downside risks for CAD today." ING sees the risk of USD/CAD rising above 1.45. It last trades up 0.1% at 1.4410. The BOC's decision is at 1445 GMT. (renae.dyer@wsj.com)

0801 GMT - The Federal Reserve is not likely to bow to pressure to cut rates prematurely, despite the challenges posed by U.S. President Trump, says Oddo BHF's Bruno Cavalier in a note. One problem under the new president concerns the Fed's reaction to Trump's economic agenda, in particular the implementation of customs measures, the chief economist says. Another is about political interference in Fed policymaking, he adds. During his first term, Trump routinely criticized the Fed and its president in insulting terms, contrary to custom, Cavalier says. He did it again recently, while also demanding that rates be cut immediately. "Trump's criticism is not pleasant for the central bank but is unlikely to push the Fed to cut rates if business and price conditions do not justify it," Cavalier says. (emese.bartha@wsj.com)

0749 GMT - The dollar edges higher ahead of the Federal Reserve's policy meeting later as the central bank is widely expected to pause interest-rate cuts. The Fed could defy strong labor market data and expectations for strong growth by sounding less cautious about the pace of future rate cuts, XTB's Kathleen Brooks says in a note. However, any dollar falls are likely to be limited, she says. The Fed usually has a large impact on the currency market but U.S. President Trump's tariff talk is the most important driver. The DXY dollar index rises 0.1% to 107.949. The Fed's decision is at 1900 GMT. (renae.dyer@wsj.com)

0746 GMT - The U.S. economy is having a goldilocks moment, with a strong labor market not pushing inflation up, at least for now, T.Rowe Price's Blerina Uruci says in a note. "However, this is likely to be an uneasy equilibrium," the chief U.S. economist says. The possibility of tariffs pose upside risks to inflation and downside risk to growth, she says. The Trump administration's fiscal policy agenda, at the margin, is positive for growth, but immigration policy could lead to renewed labor market tightening, she says. In line with market pricing, T.Rowe Price expects the Federal Reserve to keep the fed funds target range unchanged at 4.25%-4.50%. "I expect that Powell wants the January meeting and press conference to be a non-event", Uruci says. (emese.bartha@wsj.com)

0745 GMT - Uncertainty around the U.S. economic outlook and trade policies is expected to drive up the risk premium on high-risk assets, Algebris Investments' Gabriele Foa says in a note. Markets have priced in "sudden and disruptive policy changes", but risks remain, he says. "Markets are still left wondering about Trump's trade stance and geopolitics, with threats of 10% tariffs on China and 25% on Mexico and Canada starting in February," Foa says. (miriam.mukuru@wsj.com)

0734 GMT - The FTSE 100 is expected to open little changed, according to IG. The index closed up 30 points, or 0.4%, at 8533 points Tuesday. "Today markets are likely to be in a wait and watch mode, for the sentiment around tech stocks and the Federal Reserve meeting later today," Jefferies economist Mohit Kumar says in a note. The Fed is expected to leave interest rates unchanged. Fed Chair Jerome Powell could adopt a balanced tone, acknowledging positive growth but future uncertainties, Kumar says. The decision is at 1900 GMT. Tech earnings are also in focus this week, particularly after the recent selloff. Meanwhile, U.K. Treasury chief Rachel Reeves is due to deliver a speech around 1000 GMT. (renae.dyer@wsj.com)

0734 GMT - Any spillovers from the Federal Reserve's meeting to the eurozone may be muted, ING rates strategists say in a note. They attribute this to the fact that "especially the front end of the swap curve has shown little correlation with U.S. rates recently." The increased independence of the front end of the curve suggests that the European Central Bank can exert more influence over the rates market through forward guidance, they say. The back end of the curve remains more sensitive to U.S. dynamics, implying that moves in 10-year U.S. Treasurys would spill over to the eurozone, they say. Eurozone bond yields edge lower, tracking U.S. Treasury yields. The 10-year Bund yield falls almost 3 basis points to 2.535%, according to Tradeweb. (emese.bartha@wsj.com)

0727 GMT - The Reserve Bank of India has kicked off its easing cycle with a liquidity boost, Goldman Sachs economists say, noting the central bank's announcement of new measures on Monday. The measures will increase India's banking system liquidity by INR1.5 trillion by Feb. 20, the economists say in a research report. That marks a decisive turn in the RBI's monetary easing cycle, they say. GS expects a 25bps repo rate cut by the RBI in February and another 25 cut in April, with risks tilted toward more easing if the government sticks to fiscal consolidation in the union budget on Feb. 1. GS also expects the RBI to keep liquidity in surplus and allow the overnight inter-bank rate to fall 25 bps below the repo rate, to the bottom of the liquidity adjustment corridor. (ronnie.harui@wsj.com)

The Swedish krona briefly falls after the Riksbank cut interest rates by 25 basis points to 2.25% as expected and refused to rule out further cuts. Sweden's central bank said its previous guidance to cut rates once more in the first half of 2025 essentially stands but it is "prepared to act if the outlook for inflation and economic activity changes." Several factors could affect economic developments and the policy rate going forward, it said. The Riskbank pointed to global uncertainties including U.S. and Europe fiscal policies and geopolitical tensions. It also highlighted risks related to the Swedish economy's recovery and the krona. EUR/SEK trades at 11.4690, little changed from levels before the decision, after briefly rising to 11.4805. (renae.dyer@wsj.com)

The Swedish krona could fall in the near-term if the Riksbank delivers a widely-expected 25 basis-point interest-rate cut on Wednesday and signals further rate cuts, Rabobank's Jane Foley says in a note. Sweden's central bank indicated in December that it could cut rates once again in the first half of 2025. However, there is some market speculation of two cuts this year, she says. Any suggestion of further rate cuts beyond Wednesday's expected move could weaken the krona. However, the nearing end of Sweden's rate-cutting cycle and "optimism that the economy is pulling away from recessionary conditions" should support the krona in coming months. Rabobank retains a three-month forecast of EUR/SEK at 11.40. It is last up 0.1% at 11.4817.(renae.dyer@wsj.com)