The USD/NOK exchange rate continued its strong uptrend, reaching its highest swing since March 2020. It has risen in the past four consecutive weeks, reaching a high of 11.41, up by over 10% from its lowest level in October last year. So, what next for the Norwegian krone as the country’s inflation heads south?
Norway’s inflation points to rate cuts
The USD/NOK pair continued its uptrend after the latest Norwegian consumer inflation data. According to the country’s statistics agency, the headline consumer price index (CPI) dropped from 0.3% in November to minus 0.1% in December, a bigger decline than the expected 0.1%.
Norway’s annual inflation dropped from 2.4% to 2.2%, also lower than the expected 2.5%. Meanwhile, core inflation, which excludes the volatile food and energy prices, dropped from 0.1% to minus 0.1% and from 3.0% to 2.7%. These numbers were lower than the expected 0.0% and 2.8%.
Therefore, with the country’s inflation falling, the country’s central bank will likely start cutting interest rates later this year. Unlike most central banks in the developed world, Norges Bank has maintained interest rates steady at 4.5% in the last nine meetings.
The bank has signaled that it will start lowering rates this year and cutting at least three times, which would take them to 3.75%.
Those rate cuts will help to supercharge an economy that is showing signs of slowing down. The most recent data showed that the headline Consumer Price Index (CPI) contracted by 1.8% in the third quarter after growing by 1.4% a quarter earlier.
One reason for this slowdown is that the European Union, its biggest trading partner, is going through a major slowdown. On the positive side, Norway is benefiting as crude oil prices bounce back.
Brent, the global benchmark, has rebounded to $77.6, while the West Texas Intermediate (WTI) has moved to $75. Natural gas prices have also bounced back as European demand continues rising. These are notable developments since Norway is a leading seller of crude oil and natural gas.
US dollar index strength
Therefore, the USD/NOK pair has soared as signs that the Federal Reserve and the Norges Bank will diverge this year.
The Federal Reserve has maintained its hawkish view and hinted that it will deliver just two cuts this year. In contrast, Norges Bank expects to cut rates at least four times.
The USD/NOK has also surged because of the ongoing US dollar index rally. Data shows that the DXY index has jumped to $109 this year, up from $100 last year as the currency gained steam across most currencies.
This rally is because of the hawkish Federal Reserve and the fear of the incoming Donald Trump administration. The Fed believes that his policies will be inflationary, reducing the need for more cuts.
The most important economic data to watch in the near term will be the US nonfarm payrolls (NFP) and the US consumer price index (CPI).
USD/NOK technical analysis
USDNOK chart by TradingView
The weekly chart shows that the USD/NOK exchange rate has been in a strong uptrend in the past few months. It recently crossed the important resistance point at 11.27, its highest level on October 23rd.
The pair has also remained above the 50-week moving average. It is also slowly forming a bullish pennant chart pattern comprising a vertical line and a triangle pattern. Therefore, as the triangle pattern nears its confluence, there are signs that it will stage a strong comeback in the coming weeks. Such a move will see it soar to the psychological point at 12.
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