Dovish Norges Bank Could Weigh On The Norwegian Krone

by: Forexyard

By Russell Glaser

On Wednesday at 13:00 GMT the Norwegian central bank will meet. Markets have already priced in a 25 bp cut but there may be scope for further easing of monetary policy which would likely weigh on the NOK.

The 25 bp rate cut would take the Norwegian interest rate lower to 2.00%, though some economists are calling for a 50 bp reduction. Recent inflation data suggests there is room for additional interest rate cuts in 2012. Statistics Norway said inflation for the month of November remained unchanged at 1% while year-over-year inflation is up 1.2%. The Norges bank keeps an inflation target of 2.5%.

As is the case with most central banks the Norges Bank is facing headwinds from the European debt crisis and is affecting Norwegian monetary policy. At the last Norges Bank press conference Governor Oeystein Olsen made it clear interest rates would decline if global growth were to turn lower. As of the latest EU economic summit, the European debt crisis remains unsolved and European bond yields are once again falling under pressure. In addition Europe looks headed for a recession in 2012 given the sharp fall in PMI surveys. Thus, the Norges bank could sound more dovish in its press conference that will begin at 13:00 GMT on Wednesday.

The USD/NOK has support from last week’s low at 5.7110 with resistance in a range between the November high of 5.9350 and the October high of 5.9700. A break here would expose 6.1465, the 61% Fibonacci retracement from the June 2010-July 2011 move.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.