Norges bank plans for September rate hike. USDNOK on the back foot

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Norway’s central bank held its monetary policy meeting last week where it left the interest rates unchanged at record lows of 0.5%. This was widely expected by the markets but the central bank laid the groundwork for a possible rate hike in September. This was in line with the forecasts given by the central bank in March.

In its monetary policy statement, the Norges bank said that the outlook for the Norwegian economy was stable and was in line with the central bank’s policies to justify a rate hike in interest rates.

“The Executive Board’s current assessment of the outlook and balance of risks suggests that the key policy rate will most likely be raised in September 2018,” Norges bank said in its monetary policy statement released on Thursday.

If the central bank follows through with its rate hike plans, then it would mark the first interest rate hike in nearly seven years. The proposed rate hike comes despite consumer prices staying weak. Consumer prices have remained weak despite oil prices have been trending higher.

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Norway’s annual inflation rate was seen falling to 2.3% on the year in May. This came after inflation touched at 13 month high of 2.4% just the month before. Consumer prices slowed across a wide range of sectors including housing and utilities, food and non-alcoholic beverages among others.

However, offsetting the weakness was the rebound in Norway’s housing market and the increasing need for the central bank to hike interest rates.

The decision on forward guidance from the Norges bank was in stark contrast with its close partner, Sweden. The Swedish Riksbank proposed to keep interest rates steady on account of weaker inflation.

The Norges bank is also expected to hike interest rates twice next year. The hawkish forward guidance comes amid the ECB preparing to exit its quantitative easing program by end of this year.

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The central bank noted that while it would taper its current bond purchases by half to 15 billion euro, it planned to end the bond purchases by December 2018.

However, at the same time, ECB officials noted that interest rates would remain unchanged at least until summer of 2019.

The Norges bank also gave its economic forecasts last week. It expects that the mainland economy would advance 2.6% on the year. This was broadly unchanged but the forecasts are nonetheless higher than the 2017 annualized GDP. Norway’s economy advanced 1.9% in 2017.

Analysts noted that the hawkish guidance, reiterating a rate hike this year comes as the central bank shifts focus from inflation (unlike the Swedish Riksbank) and puts more focus on the economy.

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Expectations are already starting to build that the Norges bank will hike rates two more times next year in March and September. The Norwegian Krona strengthened sharply on the news following the previous few months of declining against the U.S. dollar.

From a technical perspective, the USDNOK has been consolidating after the U.S. dollar rose to a five month high in May this year.

The currency pair has been posting declines ever since and the price action indicates a potential head and shoulders pattern that could be evolving against a moderately rising neckline.

The retest of the brief support level turned to resistance at 8.1887 suggests the formation of the right shoulder. Therefore, if price action breaks past the rising neckline, the projected declines could push the USDNOK back to the April 2018 lows of 7.7567 – 7.7355 at the very least.

USDNOK
USDNOK – Technical Outlook: Evolving head and shoulders pattern

This view would of course be invalidated in the event that price action reverses the losses and closes back above the 8.1887 resistance that has been established.

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