EUR/NOK: Stronger USD and lower inflation to outweigh rate hikes of Norges Bank – Danske Bank

EUR/NOK has moved higher over the last month. Economists at Danske Bank believe that the combination of a turn in the global industrial cycle, a stronger USD and/or lower inflation expectations will act as headwinds for the Norwegian krone outweighing the increasing rate hike expectations of Norges Bank. 

USD strength will continue to be a headwind for NOK

“The last month has supported our notion of a weaker NOK despite Norges Bank signalling 4 rate hikes over the coming 12M. The reason behind the NOK setback lies in the global environment as the ‘reflation theme’ has stalled.” 

“The combination of a turn in the global industrial cycle, a stronger USD and/or lower inflation expectations often constitute an environment in which NOK suffers.”

“In light of recent price action, we lift our profile slightly to 10.30 in 1M (from 10.20), 10.40 in 3M (from 10.30), 10.60 in 6M (from 10.40) and 10.50 in 12M (from 10.40).”

“The biggest risk to our call is the direction of global reflation, which could send the cross lower or even higher than we pencil in. Near-term watch out for Fed’s guidance.”