• The Krone gathers pace to the 9.6000 region vs. EUR.
  • The Norges Bank raised rates by 25 bps to 1.0%.
  • The cross plummets to fresh 4-month lows near 9.6000.

The Norwegian Krone is trading sharply higher vs. its European peer on Wednesday, dragging EUR/NOK to fresh multi-month lows in the vicinity of the 9.6000 handle.

EUR/NOK in 4-month lows

NOK picked up extra pace and clinched fresh 2019 highs vs. the shared currency after the Norges Bank raised its key rate by 25 bps to 1.0%, matching the broad consensus.

The Scandinavian central bank once again demonstrated it is the most hawkish member of the G10 select club. The bank reiterated the economy is running on a solid pace and capacity utilization is above normal levels, while inflation keeps navigating above the bank’s target.

Furthermore, the Norges Bank signaled rates could be increased further in the second half of the current year.

What to look for around NOK

The hawkish stance of the Norges Bank coupled with the solid fundamentals in the Nordic economy adds to the case for a stronger Krone in the months to come. This, in combination with the bullish prospects around the Brent crude favours extra downside in the cross. This scenario looks reinforced by this month’s Regional Network Survey, which stressed the growth outlook for the economy remains strong. In addition, the first quarter is usually NOK-positive reinforced by tighter conditions in structural liquidity.

EUR/NOK significant levels

As of writing the cross is losing 0.97% at 9.6025 and a break below 9.5533 (78.6% Fibo of the October-December rally) would aim for 9.5027 (monthly low Nov.8 2018) and finally 9.4161 (monthly low Oct.17 2018). On the other hand, the initial hurdle aligns at 9.7376 (55-day SMA) seconded by 9.8411 (high Feb.11) and then 9.8803 (high Mar.8).

Sean Callow, analyst at Westpac, points out that the FOMC managed to deliver a dovish surprise and the median is now for 0 hikes in 2019 and just 1 by end-2021, from 3 in Dec.

Key Quotes

“Along with the “dots”, the Fed trimmed its 2019 and 2020 GDP forecasts to 2.1% and 1.9% (the White House budget projections are 3.2% and 3.0%) and announced that its balance sheet runoff (quantitative tightening) would conclude in Sep 2019, earlier than many expected.”

“The Fed’s switch to projection of a rates pause of at least 12 months should reverberate on the dollar and US yields for some time, weighing on DXY towards its January lows. But beyond that, most major currencies are not likely to be compelling alternatives.”

“We don’t expect pricing for Fed easing to gain too much traction.”

Sonia Meskin, US economist at Standard Chartered, suggests that for the FOMC, while the number of hikes remaining in this cycle still matters, the Committee appears less concerned about the precise level of rates at which the US economy enters the next downturn than about other potential policy tools.

Key Quotes

“We believe the dovish FOMC shift occurred in the context of downside risks to growth and a partial shift in its focus from currently still-strong cyclical momentum to the next downturn.”

“The Committee was taken aback by the combination of global growth fears and domestic market turmoil in Q4-2018. Continued escalation of these factors could have precipitated an economic downturn. While pressures across markets have abated, the FOMC has clearly shown that it is more worried about the downside than upside risks to the global economy.”

“In addition, given that the US economy and investors may be unable or unwilling to tolerate real rates far from the zero lower bound (ZLB) at this late stage of the cycle, the Committee must actively consider other tools for the next downturn. Studies suggest that a relatively frequent encounter with the ZLB is associated with lower inflation expectations and sub-optimal real growth outcomes.”

• EU-27 leaders said to insist May 22 as the Brexit extension date rather than June 30.
• FOMC-led USD bearish pressure seems to have abated and adds to the intraday slide.
• Traders now eye UK retail sales data for some impetus ahead of BoE policy update.

The GBP/USD pair failed to capitalize on the early attempted recovery and dropped to fresh session lows, around mid-1.3100s in the last hour.

Having posted a session high level of 1.3227, the pair met with some fresh supply in reaction to news that the EU-27 leaders are looking at May 22 as the Brexit extension date, over a month earlier than June 30 requested by the UK PM Theresa May.

The reasoning here is that EU-27 leaders want to avoid a political clash with the European Parliament elections, due on May 23, and gives May less time to get her deal through the UK parliament, which was eventually seen exerting some fresh downward pressure on the British Pound.

Meanwhile, the recent US Dollar bearish pressure, further aggravated by the Fed's more dovish outlook than previously expected, now seems to have abated, at least for the time being, and further collaborated to the pair's sharp intraday slide of around 75-80 pips.

The downside, however, remained cushioned as investors still seemed reluctant to place any aggressive bets ahead of the latest BoE monetary policy update and any fresh Brexit-related headlines coming out of the EU economic summit, starting today.

In the meantime, today's UK economic docket, highlighting the release of monthly retail sales data, though seems unlikely to be a major game changer, will be looked upon for some short-term trading opportunities.

Technical levels to watch

  • The FOMC-led sharp rebound on Wednesday lifted EUR/USD to fresh multi-week highs near 1.1450, fully reversing at the same time the March pullback.
  • The up move, however, run out of steam ahead of the 5-month resistance line, today at 1.1416, which continues to offer a tough resistance. This resistance zone is reinforced by the 50% Fibo retracement of the 2017-2018 rally, at 1.1448.
  • Spot needs to clear this important area to allow for a potential test of the critical 200-day SMA at 1.1481 ahead of the 1.1500 neighbourhood.

EUR/USD daily chart

  • DXY is seeing some light at the end of the tunnel following the sharp Fed-induced sell-off to the vicinity of 95.70 on Wednesday, around the key 200-day SMA.
  • A breach of this area of support should allow for a retracement to 95.16, late January low.
  • On the broader picture, the greenback’s stance still appears constructive while above the short-term support line, today at 95.51.

DXY daily chart