Norwegian GDP to support the NOK

In the UK the event of the week will be today’s Bank of England Inflation Report (IR). The MPC has indicated that the forward guidance framework will be reviewed in the IR as unemployment has come down rapidly to 7.1%. Although a wide range of options are available (e.g. lowering the threshold to 6.5%, shifting to another target measure etc.), we expect a shift towards more qualitative guidance. We believe the MPC will come to the same conclusion as the Fed and prefer softer communication instead of tying itself to a new measure. We would expect the general message to be that the economy still needs low interest rates, that the MPC sees no immediate need to raise rates and that, when time comes, the move higher will be very gradual.

Although we expect the BoE to put forward a dovish tone today, signalling that the economy still requires the current low rate policy, the question is if BoE will be able to flatten the money market curve materially from current levels. GBP has as a consequence of the lower UK market rates lost a bit of its shine recently. Hence, the negative impact on sterling from a dovish BoE today should be relatively small. Looking a few months ahead we still expect a very divergent monetary policy from the BoE and the ECB and expect EUR/GBP to fall towards 0.80 during the course of 2014. Today, however, the risk is tilted marginally to the upside for the cross.

It was business as usual for Yellen yesterday despite the recent weakness in data. This gave some support to USD and EUR/USD was slightly lower and USD/JPY slightly higher overnight. Especially the latter should see more upside as risk markets also interpreted Yellen’s comments positively. AUD received some support overnight as the Chinese import and export data were stronger than expected.

Finally, the Norwegian GDP numbers are expected to confirm that the Norwegian economy is better that its reputation and with the support to commodity and risk currencies in general we expect EUR/NOK to edge lower today. Norwegian growth slowed in 2013 due to weak growth in consumer spending, lower growth in housing investment and a weaker contribution from oil investment but there are no signs of any serious downturn in the Norwegian economy, as the fundamentals are still sound. We expect mainland GDP to grow 0.5% q/q in Q4, which is marginally higher than projected by Norges Bank in the December monetary policy report (0.43%) and the market (0.4% q/q). This would underline the absence of any need to cut interest rates in Norway and would also support NOK. The numbers comes one day ahead of the annual address by Governor Olsen tomorrow night. Given the market still price a probability of a rate cut in Norway Olsen might in fact sound a bit more upbeat. But note that the annual address has not really been a market mover the last couple of years.

Danske Bank