Over the last week the Pound Sterling to Norwegian Krone (GBP/NOK) exchange rate has slumped substantially to reach a three-month low of 12.5165, driven mainly by a resurgence in global oil prices.
The Pound was weighed down by the release of the September UK Services PMI, which fell far short of the forecast minor uptick to clock in at reduced growth of 53.3. As the service sector is the single largest contributor to domestic GDP this naturally saw a rise in slowdown concerns. Investors were thus inclined to move away from the softened Sterling as the odds of a nearer-term Bank of England (BoE) interest rate increase appeared to diminish further.
In an unexpected reversal of position Russia has recently indicated a willingness to enter talks with other oil producing nations regarding the current market climate, a sign which some pundits hope could precede a generalised drop in global production. This prompted a strong rally for oil, with the price of Brent crude entering a strong upturn to reach a mid-week peak of $52 per barrel.
Wednesday’s Industrial Production data for both Norway and the UK showed some decided improvement, with the year-on-year Norwegian figure printing substantially stronger than expectations of 1.4% by coming in at 3.1%. While this offered some reassurance in the health of the domestic economy, the day also saw the publication of a contracting Manufacturing Production figure, suggesting that performance in the Norwegian economy remains more mixed. Nevertheless, the strength of oil helped to keep the Krone trending strongly against rivals.
Traders were surprised on Thursday by the dovishness of the BoE Monetary Policy Committee (MPC) meeting minutes, even though the unchanged 8-1 decision to hold interest rates at their current low of 0.5% was as markets anticipated. Comments on the UK’s inflation outlook counteracted the lower level of concern attributed to emerging market and Chinese slowdown risks, indicating that policymakers felt no particular pressure to begin the cycle of monetary tightening in the imminent future. In consequence, economists dialled back forecasts for the first BoE interest rate hike to occur in the second quarter of 2016, or even later, to send the GBP/NOK currency pair on a fresh downtrend.
Oil values have weakened towards the end of the week, with US crude inventories having unexpectedly risen more than three million barrels and economists suggesting that the present rally is a temporary improvement amidst a greater downturn. Nevertheless, the Krone has remained dominant, taking advantage of the renewed dovish sentiment towards Sterling.
On Friday the Krone could strengthen further with the release of Norwegian Inflation Rate data, with pundits anticipating a general improvement across the board. September year-on-year inflation is forecast to rise from 2.0% to 2.1%, edging progressively nearer to the Norges Bank’s ultimate target of 2.5%. Continued softness in US data is also likely to benefit the Krone, as the odds of an imminent Fed interest rate hike diminish and thus relieve the pressure of a stronger US Dollar on the Nordic currency.