Norway’s May CPI release on Wednesday is in focus after Norges Bank’s surprise move on 6 May, when it lifted the policy rate by 25bps to 4.25% and signalled scope for a further increase by year-end. Headline inflation is forecast at 3.1% y/y, down from 3.4% in April, while underlying CPI is seen at 3.3% y/y versus 3.2% previously. Norges Bank itself projects both CPI and underlying CPI at 3.3% y/y for May, so an upside reading would raise the chance of an earlier follow-up hike.
Markets are already pricing further tightening, with the swaps curve implying a full 25bps rise to 4.50% in November. In foreign exchange, USD/NOK is expected to track broader US dollar strength, yet the krone may still fare better against other counterparts if elevated energy prices persist. Support comes from an improved terms of trade and fiscal capacity that can cushion the drag on domestic demand.
Potential Impact of June CPI on Norges Bank Policy
We see the upcoming release of Norway’s June CPI data in early July as a pivotal moment for the Krone. A surprisingly high inflation number could accelerate the timeline for another rate hike from Norges Bank. This follows their hawkish hold at the meeting last week, where they signaled persistent inflation concerns.
The market has just absorbed the May inflation figures, with underlying CPI coming in at a sticky 4.1% year-over-year. We anticipate that Norges Bank’s own projections for June will be around 4.0%, and any print above this level will intensify pressure for another hike. Recent statistics show Norway’s unemployment rate remains low at 3.9%, giving the central bank scope to tighten further if needed.
At its early June meeting, Norges Bank kept the policy rate at 4.50% but emphasized that inflation remains well above its 2.0% target. The overnight index swaps market is now pricing in a greater than 70% chance of a final 25 basis point hike by the September meeting. Historically, Norges Bank has not shied away from surprising markets to maintain its inflation-fighting credibility.
NOK Outlook Against Major Currencies
While broad U.S. dollar strength is likely to continue, especially after the strong May U.S. jobs report showed 272,000 jobs added, we do not favor buying the Krone against the dollar. This strength will likely cap any significant gains in USD/NOK. The U.S. Federal Reserve’s commitment to holding rates higher for longer supports a strong dollar environment.
Instead, we believe the Norwegian Krone is positioned to outperform on its crosses, particularly against the Euro (EUR/NOK). Norway’s economic fundamentals are supported by firm energy prices, with Brent crude holding steady above $80 per barrel, boosting its terms of trade. This contrasts with a more fragile growth outlook in the Eurozone, where the ECB has already begun its easing cycle.
For derivative traders, this outlook suggests positioning for NOK strength against other European currencies. We see value in buying NOK call options against the EUR, providing upside exposure to a falling EUR/NOK cross with limited downside risk. Alternatively, selling EUR/NOK forward contracts for the three-month tenor could be an effective way to position for a hawkish Norges Bank.
