Potential downside at play for GBPNOK?

• Rationale for buying the Norwegian krone: The Norwegian Bank is one of the last central banks likely to cut interest rates. The bank’s decision to keep interest rates unchanged, coupled with rising inflation and wage growth expectations, indicates a hawkish stance. The Norwegian krone is undervalued, and the Norwegian Bank’s preference for a higher exchange rate to combat imported inflation supports the Norwegian krone’s long position.
• Rationale for selling sterling: The Bank of England’s language showed a dovish bias last week, as it discussed potential interest rate cuts despite flat core inflation. The report indicates the possibility of interest rate cuts in late summer. The British pound is viewed as weak due to rising inflation and potential interest rate cuts, making it a suitable candidate for short positions against the Norwegian Krone.

It looks like a traditional BCA central bank policy trade. As we noted yesterdayRisk premia appear to be a bit lower heading into the UK election, so we would not be surprised to see some downside impact the GBP.

This article was written by Arno V Venter at www.forexlive.com.