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EURNOK: Norges Bank’s Dovish Shift Could Expose 9.10 in Time

Traders are understandably focused on digesting yesterday’s less-hawkish-than-expected FOMC meeting as well as today’s Eurogroup meeting, which has been billed as the “drop dead” date in Greece’s debt negotiations, but we’ve also seen a major shift from Norway’s Norges Bank in today’s European session.

As expected, the Norges Bank cut interest rates from 1.25% to 1.00%, but more importantly, the central bank also signaled that it was likely to cut interest rates further later this year. In the words of Norges Bank Governor Oeystein Olsen, “The current assessment of the outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the course of autumn.”

Norway’s oil-reliant economy has been battered by the precipitous drop in the price of Brent crude oil over the last year. To wit, Q1 growth for the country recently came out subdued at 2.0% y/y, and that figure included an unusually large build-up of inventories; in other words, the near-term sustainable growth rate is likely even lower than the reported 2.0% rate. Meanwhile, both Norway’s labor market and price pressures are likely to get worse before they get better.

As bizarre as it sounds, the Norges Bank’s 1.0% interest rate is still seen as attractive relative to its regional rivals, with both the ECB and Sweden’s Riksbank sporting negative interest rates and active quantitative easing programs. As a result, the base case for Norway’s central bank is another rate cut at its next meeting in September in order to prevent an unwelcome rise in the value of the krone.

Technical View: EURNOK

Speaking of the krone, EURNOK is predictably seeing a sharp rally today on the back of the Norges Bank’s dovish outlook. Like EURJPY, the pair is showing a clear Bullish Flag pattern after rallying sharply through late May and pausing for the last two weeks. The recent consolidation has taken the 14-day RSI indicator out of overbought territory, and it is holding its 2-month bullish trend, clearing the way for another leg higher in EURNOK itself.

Of course, the specter of a potential Greek default is still looming over the pair, potentially putting the brakes on any sustained rally, but if we do see progress toward an 11th-hour deal, EURNOK would be poised for a big rally on both a technical and fundamental basis. To the topside, the 38.2% Fibonacci retracement at 8.91 would be the next major hurdle, followed by the 50% retracement near 9.10. To the downside, support could emerge near the convergence of the bottom of the bullish flag and the 200-day MA around 8.60.

 

Source: FOREX.com

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