SEK strength likely temporary

Tariff policy takes centre stage

The dominating theme for markets has been news regarding tariff policy from President Trump. While the rhetoric on tariff-threats has been confrontational there has so far been limited news on actual implementation. This aligns with our view that Trump ultimately will underdeliver. US macro data has been stronger than expected with a resurgence in inflationary pressures and a continued strong labour market, lending support to a hawkish Fed. In commodity space, European natural gas prices have moved sharply higher due to the cold weather, increased competition for LNG cargoes and slightly below average filling levels in the European storages. Oil prices have on the other hand edged lower. Geopolitical uncertainty remains elevated with impending Russia/Ukraine-peace talks.

Over the past month, the USD has been in for a volatile ride with tariff announcements from the Trump administration taking centre stage. SEK has moved sharply higher following a higher-than-expected inflation print leading to repricing of the Riksbank. GBP has regained some lost ground after the move higher in real rates, a re-tightening of financial conditions and risk-off sentiment sent EUR/GBP higher at the beginning of the year given the UK's fragile fiscal position. The JPY has outperformed following strong data out of Japan leading to a repricing of BoJ.

Outlook: Positive on the USD and negative on Scandies

We maintain a negative medium-term view on EUR/USD, expecting the pair to gradually decline towards 1.00 over a 12M horizon on the back of anticipated pro-growth and inflationary policies in the US along with our expectation of relatively stronger US growth dynamics. In the near term, direction remains uncertain, with tariff and geopolitical headlines continuing to drive price action and we expect EUR/USD to consolidate around current levels in the near term. We remain medium- to long-term negative on NOK on elevated unit labour cost, continued tightness in global monetary conditions and below-trend global growth. The medium-term headwind for the broad SEK remains intact given the scope for continued US outperformance in terms of productivity growth and US equities as the main source of Swedish investment flows.

Risks to our forecasts primarily lie in a sharper economic downturn than what we pencil in and a resurge in inflation. A much harder landing than what we pencil in would require sharp easing of global monetary conditions, which would likely entail a much weaker USD (after an initial squeeze higher) and much weaker cyclically sensitive currencies than in our base case. With the US Red sweep, the risk of a re-acceleration of US inflation and hence USD real rates in the coming years has also risen.

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