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Bearish Long-Term Position in EUR/NOK as Norway Rate Hike Nears

Bearish Long-Term Position in EUR/NOK as Norway Rate Hike Nears

Martin Essex, MSTA,

EUR/NOK price, news and analysis:

  • New Zealand surprised the markets this week by keeping its interest rates unchanged when an increase had been expected. That means Norway could become the first developed country to raise them.
  • By contrast, the European Central Bank will be among the last. Yet EUR/NOK has been strengthening.
  • A reversal in due course, with the cross dropping below 10.00, would therefore be no surprise.

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Bearish EUR/NOK as Norges Bank prepares to raise rates

EUR/NOK has strengthened significantly since April 29 this year, when it dropped to 9.8985, its lowest level since January 2020. Now, having reached a high of 10.7044 a month ago, further losses look likely – with a fall back to below 10.00 quite possible in due course.

EUR/NOK Price Chart, Daily Timeframe (April 28 – August 18, 2021)

Source: IG (You can click on it for a larger image)

The key here is interest rates. The Reserve Bank of New Zealand surprised many in the markets this week by leaving its Official Cash Rate unchanged at 0.25% in response to news of a case of the Delta variant of Covid-19 and a consequent lockdown. An increase had previously been expected.

That means Norway’s Norges Bank will likely become the first central bank in a developed country to raise rates. At a press conference in June its Governor said it will “most likely” raise rates from the current record low 0% in September and suggested it will deliver 25 basis point hikes each quarter over the coming year as the Norwegian economy recovers.

Compare that with the European Central Bank, which is not expected to tighten monetary policy until well after the central banks of New Zealand, Canada, the US, Australia, the UK and China – roughly in that order.

It won’t, of course, be a one-way street but an eventual drop back to that 9.8985 low from April is clearly a possibility.

More interested in trading EUR/USD? Check out our guide here

Or like to read our top strategies and tips for trading Gold? That’s here

--- Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.