Near-term NOK strength, medium-term bearish on Scandies

The Fed kicks of its cutting cycle

The Fed has initiated its cutting cycle, delivering a 50bp rate cut as concerns have shifted from too high inflation towards a weakening labour market. Going forward, we think the Fed will cut by 25bp at every meeting until H2 2025. On the contrary, Norges Bank pushed back against market expectations for a rate cut this year and the BoE similarly delivered a cautiously hawkish tone. In China, the economy has lost further momentum with a continued deterioration in domestic demand, weak industrial production and no improvements in the housing crisis. This leaves China as a key disinflationary force for the global economy. This has also contributed to the manufacturing sector losing steam in the rest of the world, which acts as a headwind for not least the European economy. Earlier this month, oil prices declined to the lowest level since 2021, breaching below 70.

USD/bbl amplified by recession concerns. Over the past weeks, NOK has benefitted from an improvement in risk sentiment and a push-back on rate cut expectations from Norges Bank. Akin to the NOK, GBP has found support from a cautiously hawkish BoE, pushing EUR/GBP firmly below the 0.84 mark. EUR/USD has been in for a v-shaped price action dominated by changes in risk sentiment amid receding recession fears and relative central bank outlooks. The big winner continues to be the JPY, which has benefitted from lower US rates and hawkish commentary from the BoJ.

Outlook: Lower EUR/USD and medium-term headwinds for Scandies

We believe that fundamental factors indicate a lower EUR/USD driven by our expectation of stronger US growth dynamics supporting the USD. In the near term, we expect the cross to trade within a range as relative monetary policy outlooks take centre stage. In the near-term we pencil in a somewhat stronger NOK based on the global investment environment stabilising, a short-term valuation adjustment and a hawkish Norges Bank. That said, we remain medium- to long-term bearish on NOK based on weak global growth, contractionary global monetary conditions and elevated unit labour costs. Also, for the SEK, we expect the cyclical and structural flows to continue to act as headwinds over the coming 6-12M, targeting EUR/SEK at 11.60 in 6-12 months.

Risks to our forecasts primarily lie in a sharper economic downturn than what we pencil in. A much harder landing than what we pencil in would require a sharp easing of global monetary conditions, which would likely entail a much weaker USD (after an initial squeeze higher) and much weaker cyclically sensitive currencies than in our base case. In the near-term, we will closely monitor the state of the US economy and by extension the direction of US monetary policy.

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