Swedish Monetary Policy Shift and EUR/SEK Outlook in September 2025: Positioning for Riksbank’s Rate Cut and Its Ripple Effects on Cross-Currency Flows and EM Exposure

The Riksbank’s Dovish Pivot and September 2025 Rate Cut Outlook

The Riksbank’s August 2025 decision to maintain the policy rate at 2.00% underscored a fragile economic recovery, with inflation above target due to temporary factors like seasonal services and energy costs [1]. However, weak growth, cautious household spending, and a stagnant labor market have reinforced expectations of further easing. UBS economists forecast a 25-basis-point cut in September 2025, reducing the rate to 1.75%, contingent on August inflation data showing a cooling trend [2]. Market pricing currently reflects a 9-basis-point cut at the September meeting, with 19 basis points anticipated by year-end [2].

The Riksbank’s September 23, 2025, monetary policy report will be pivotal. If inflation continues to decline and economic activity remains soft, the central bank may prioritize growth over inflation risks, accelerating its dovish pivot. This aligns with broader global trends, as the European Central Bank (ECB) and Bank of England (BOE) also signal rate cuts, creating divergent monetary policy cycles [3].

EUR/SEK Exchange Rate: A Tale of Divergence and Dovishness

The EUR/SEK exchange rate has appreciated by 5% since January 2025, driven by a weaker U.S. dollar and global capital reallocation away from USD-based assets [4]. The SEK’s strength is further supported by Sweden’s robust public finances and relatively stable inflation, despite temporary spikes. However, the Riksbank’s rate cuts could weaken the SEK against the EUR, particularly if the ECB maintains a tighter policy stance.

UBS projects EUR/SEK to decline to 10.90 by Q3 2025 and 10.75 by year-end, assuming the Riksbank proceeds with its rate cuts [2]. This would reflect a narrowing interest rate differential between Sweden and the Eurozone. Conversely, any upside inflation surprises in Sweden could delay cuts, pushing EUR/SEK below 11.00 [2]. Investors should monitor the Riksbank’s inflation forecasts and the ECB’s rate trajectory, as these will dictate cross-currency flows.

Emerging Market Exposure: Capital Flows and Strategic Rebalancing

The Riksbank’s easing cycle, coupled with global monetary policy divergence, presents opportunities and risks for emerging market (EM) investors. A weaker SEK could enhance the competitiveness of Swedish exports, indirectly supporting EM markets reliant on trade with Sweden. Additionally, as developed markets ease rates, capital may flow into EM assets offering higher yields, particularly in regions with strong fundamentals and manageable debt levels [5].

Goldman Sachs’ 2025 outlook highlights the importance of recalibrating EM exposure strategies. Investors should prioritize markets with:
1. Resilient Domestic Demand: Countries with improving consumer confidence and fiscal stimulus.
2. Currency Hedges: Use forwards or options to mitigate FX risk, especially in cases where the SEK depreciates.
3. Sector Diversification: Focus on sectors less sensitive to global trade cycles, such as technology or healthcare.

However, geopolitical risks—such as U.S. tariff expansions—remain a wildcard. EM investors must balance the allure of higher returns with hedging against policy uncertainty and currency volatility [5].

Conclusion: Navigating the Cross-Currency Crossroads

The Riksbank’s September 2025 rate cut decision will be a linchpin for EUR/SEK dynamics and EM capital flows. A dovish pivot could weaken the SEK, creating both challenges and opportunities for investors. Positioning strategies should emphasize flexibility, leveraging EM markets with strong fundamentals while hedging against currency swings. As global central banks navigate divergent paths, agility and macroeconomic foresight will be critical to capitalizing on the shifting landscape.

Source:
[1] Policy rate unchanged at 2 per cent | Sveriges Riksbank, [https://www.riksbank.se/en-gb/press-and-published/notices-and-press-releases/press-releases/2025/policy-rate-unchanged-at-2-per-cent/]
[2] UBS expects Swedish rate cut in September; comments on EUR/SEK, [https://www.investing.com/news/forex-news/ubs-expects-swedish-rate-cut-in-september-comments-on-eursek-93CH-4223853]
[3] OECD Economic Surveys: Sweden 2025: The Swedish Economy Faces Headwinds, [https://www.oecd.org/en/publications/oecd-economic-surveys-sweden-2025_75e94b2f-en/full-report/the-swedish-economy-faces-headwinds_aa0d5d3d.html]
[4] The return of the SEK, [https://www.nordea.com/en/news/the-return-of-the-sek]
[5] Asset Management 2025 Outlook: Reasons to Recalibrate, [https://am.gs.com/en-fi/advisors/news/press-release/2024/goldman-sachs-asset-management-releases-2025-outlook]