A slight narrowing of Norway’s April trade surplus was not enough to knock back the Krone, which also benefitted as market risk sentiment picked up at the start of the week. This positive outlook was built on by a sharp improvement in the second quarter consumer confidence index and bullish domestic growth data. Altogether the outlook for the Norwegian economy strengthened, particularly as the odds of an imminent interest rate hike from the Federal Reserve diminished.
The Pound weakened in response to a higher-than-expected headline consumer price index, with inflation found to have risen 2.7% on the year in April. With the Bank of England (BoE) having already reiterated its willingness to continue looking through a degree of post-referendum inflation this uptick did not bode well for the UK economy. As price pressures are likely to rise further over the coming months markets expected to see households reining in their finances more rigorously. Given that strong consumer spending has been a major driving factor for the domestic economy this weighed heavily on the Pound.
Weak UK Wage Growth Weighed on GBP NOK
While the UK unemployment rate unexpectedly fell to 4.6% in the three months to March, hitting its lowest level since 1975, this failed to shore up the GBP NOK exchange rate on Wednesday. In spite of tightening labour market conditions weekly earnings continued to rise at a sluggish pace, indicating that the squeeze on wages is set to worsen. With real wages already falling consumers are expected to come under increasing pressure in the coming months, likely exacerbating any slowing in the wider economy.
Demand for the Krone picked up, meanwhile, in spite of market risk appetite generally weakening as a result of political developments in the US. Confidence in the commodity-correlated currency was boosted by the latest US crude inventories report, which showed a further drawdown in domestic stockpiles. While the dip was not as large as forecast this helped to bolster oil prices, with Brent crude surging back above the US$52 per barrel mark.
Oil Jitters to Maintain Downside Pressure on Krone
However, as the global oversupply glut looks set to persist for the foreseeable future the Krone may struggle to hold onto its gains for long. Although both Saudi Arabia and Russia have established a willingness to extend the agreed production limiting deal by as much as nine months the agreement is still far from sealed. If Friday’s Baker Hughes rig count points towards a further acceleration in US production the mood towards oil could sour once again, with the commodity unlikely to see any significant improvement in price in the near future.
A rallying point could be in store for the GBP NOK exchange rate if April’s UK retail sales figures show a rebound from March’s -1.5% contraction in spending. Even though some uptick could be attributed to the timing of the Easter holidays a stronger showing here could still encourage investors to pile back into the Pound. However, if higher inflation is found to have already eroded consumer spending then Sterling could find itself kept on the back foot ahead of the weekend.