UBS now expects the euro to strengthen versus the Swedish krona, setting a target of 11.20 for the EUR/SEK rate by the end of the second quarter and preferring long positions in the near term. The bank's stance reflects a string of inflation readings in Sweden that have come in below central bank forecasts.
Sweden's flash inflation report for March showed CPIF excluding energy at 1.1% year-over-year, underperforming both the Riksbank's projection of 1.5% and the consensus expectation of 1.5%. According to UBS, the March figure represents the fourth consecutive month in which inflation has undershot the central bank's predictions.
The Riksbank reiterated last month that its policy rate is expected to remain at 1.75% "for some time to come" while also noting flexibility depending on how developments in the Middle East affect growth and inflation. UBS notes that market pricing has shifted markedly since the start of the conflict - moving from pricing 7 basis points of Riksbank easing to pricing 75 basis points of hikes by the end of the year.
Looking ahead, UBS economists forecast CPIF excluding energy to drop to 0.6% year-over-year in April, driven by a VAT cut on food. They expect inflation to hover around 1.0% until July before gradually climbing to 1.8% in December. Based on this outlook, UBS considers the Riksbank among the central banks least likely to meet market expectations for tightening.
On labour market metrics, Sweden's trend unemployment rate currently stands at 8.5%. That is a decline from the 2025 high of 9.0% but remains materially above the 2022-2023 low of 7.2%. UBS highlights that a relatively soft labour market, together with Sweden's system of collective wage bargaining, could restrain the development of second-round effects from energy-driven inflation.
Overall, UBS's recommendation to favour long EUR/SEK positions is rooted in weaker-than-expected inflation prints, an anticipated short-term dip in CPIF excluding energy due to the VAT cut on food, and a labour market profile that may limit wage-driven inflation pass-through. The bank's outlook assumes that the Riksbank will be less likely than markets currently price to deliver on further rate hikes.
Impacted markets and sectors include currency markets, fixed income pricing related to Swedish interest rates, consumer sectors affected by the VAT cut on food, and broader inflation-sensitive assets.