Home Forex Market Analysis USD/NOK Forms a Bearish Flag on High Norwegian Rate Hopes

USD/NOK Forms a Bearish Flag on High Norwegian Rate Hopes

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USD/NOK Forms a Bearish Flag on High Norwegian Rate Hopes

The USD/NOK is loitering near its lowest level since November 2018 as investors price-in a sooner interest rate hike by the Norges Bank. The higher oil prices and weaker US dollar have also pushed the pair lower.

Strong Norway GDP data

Like all countries, Norway was affected substantially by the coronavirus pandemic. The country recorded more than 65,000 cases and more than 592 deaths. The unemployment rate rose, retail sales fell, and industrial production declined.

However, data released by the Norwegian statistics agency show that the economy did better than many countries. Precisely, the economy contracted by just 2.5% in 2020. This performance was better than the estimated EU contraction of 6.5%. 

It is also better than that of peer countries. For example, on Friday, data by the UK office of National Statistics (ONS) revealed that the UK economy contracted by 9.9% in 2020, the worst performance in more than 300 years. 

This performance was helped by the structure of the Norwegian economy. For example, the country has a sovereign wealth fund worth more than $1 trillion. As a result, to cushion the economy, the government tapped some of these funds.

Further data by the statistics agency showed that the economy grew by 0.6% in the fourth quarter after rising by 4.5% in Q3. In the same period, the mainland economy that excludes the important oil and gas sector increased by 1.9%, better than the expected 1.2%.

These numbers are early signs that the Norges Bank will hike interest rates earlier than expected. In the past two interest rate decisions, the bank has not been shy of predicting that it will hike interest rates in the near term. This could be in the fourth quarter of this year or in the first quarter of next year.

A hawkish Norges Bank would be bearish for the USD/NOK because the Fed has already committed that it won’t hike interest rates in the near term. 

High oil prices

Norway is famous for its huge oil reserves. The country exports more than 1 million barrels of oil per day. This makes the Norwegian krone one of the currencies highly exposed to the swings of oil prices. It does well when oil price rises and vice versa.

In the past few months, the price of crude oil has been in a phenomenal rally. This week, the price of Brent soared to above $60, the first time since January last year. The price has risen by more than 270% from its lowest level in 2020.  Similarly, the West Texas Intermediate (WTI) has risen to almost $60. 

This performance is mostly because of the expectation of demand as the world economy rebounds. Also, the recent decision by Saudi Arabia to voluntarily slash production has helped boost prices. 

However, in reports published by credible institutions like OPEC, Energy Information Administration (EIA), and the International Energy Agency (IEA), there are signs that rising oil production could hurt prices.

The USD/NOK has also dropped because of the overall weak US dollar. The greenback has dropped by more than 10% from its highest point in 2020.

USD/NOK technical outlook

USD/NOK technical outlook

The USD/NOK pair has been in a steep downward trend lately. It has moved from a high of 8.6540 on February 4 to a low of 8.400. On the four-hour chart, the price seems to be forming a bearish flag pattern that is shown in pink. It has also moved along the upper side of the Bollinger Bands. The pair will likely turn lower as bears target the next support at 8.400.

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