Confidence in riskier assets has been limited over the course of the week, with markets in a jittery mood thanks to the uncertainty surrounding the new US administration. The increased protectionist rhetoric and fears of potential trade wars led investors to pile back into safe-haven assets, leaving the Krone relatively lacking in support.
However, the Pound was unable to particularly capitalise on this weakness thanks to Tuesday’s Supreme Court ruling. While the initial market reaction was positive, due to the implication of increased parliamentary scrutiny over the Brexit negotiations, this ultimately proved to be short-lived. The mood towards Sterling instead soured as the Court’s comments on the role of the devolved assemblies was seen to raise the risk of a second Scottish independence referendum.
Another weekly increase in US crude oil inventories benefited the GBP NOK exchange rate on Wednesday, as the price of Brent crude slipped in response. Investors were discouraged by this latest sign that US oil production is ramping back up, likely undoing the progress made by OPEC’s agreed output cut and potential exacerbating the global oversupply glut. This dented the commodity-correlated Krone, with lower oil prices boding ill for the outlook of the Norwegian economy.
Steady UK GDP Failed to Maintain GBP NOK Uptrend
Initially investors reacted positively to the news that the fourth quarter UK GDP figures had held steady on both the year and the quarter, offering further evidence of economic resilience. Continued quarter-on-quarter growth of 0.6% appeared to indicate that the negative impact of the referendum result has remained limited. However, growth was almost entirely fuelled the service sector and consumer spending, both of which are vulnerable to rising inflationary pressure and the possibility of a hard Brexit.
Demand for the Krone picked up in response to an unexpected drop in November’s Norwegian unemployment rate, with the measure dipping from 4.8% to 4.7%. This ran contrary to forecasts of a slight uptick in domestic unemployment, signalling that the labour market is in a more robust state than previously thought. The positive showing fuelled hopes that the Norwegian economy is turning around, finally shaking off the negative effects of the 2014 oil price slump and potentially paving the way for stronger domestic growth.
Weak Retail Sales Could Dent Krone Outlook
Monday’s Norwegian retail sales figures could put renewed downside pressure on the Krone, though, as consumer spending is predicted to have weakened in December. If sales faltered over the Christmas period this would not reflect particularly well on the health of the economy. However, as the fourth quarter industrial confidence index is expected to have edged higher at the end of the year this could limit any negative impact from poor retail data.
Further volatility is likely for the GBP NOK exchange rate ahead of the Bank of England’s (BoE) first policy meeting of 2017. While policymakers are not expected to make any particular changes at this juncture the Pound could rally if the minutes prove to be more hawkish in nature. Even though the likelihood of the BoE returning to a tightening bias in the near future appears limited, due to earlier pledges to look through any Brexit-fuelled increase in inflation, the meeting could still boost Sterling.