Norwegian Krone Could Weaken in Coming Years — Market Talk

The Swedish krona and Norwegian krone could extend recent gains on growing optimism about a potential ceasefire deal for the Russia-Ukraine conflict, ING analyst Chris Turner says in a note. "Expectations are that the U.S. will reveal more of its plans at a Munich security conference this weekend, although any breakthrough with Russia would be a major surprise and is not priced in FX markets," he says. In the near-term, EUR/SEK could fall to 11.15 and EUR/NOK could fall below 11.50, with the NOK also supported by a rise in energy prices. EUR/SEK falls 0.2% to a four-and-a-half-month low of 11.2388, according to FactSet. EUR/NOK rises 0.2% to 11.5827 after reaching a two-and-a-half-month low of 11.5337 on Monday. (renae.dyer@wsj.com)

remains offered as the weekend announcement over steel tariffs was the first to hit the European Union, said ING.

The EU is now bracing for other sectors, such as autos, to be tariffed, wrote the bank in a note. There is little justification for the EU bloc to be hit with reciprocal tariffs since the EU tariff regime is relatively low.

However, presumably, European politicians are more fearful about broader tariffs in April once the U.S. Commerce Department delivers its report on why the U.S. runs large trade deficits.

Whatever Tuesday's news on tariffs, wide rate spreads justify continuing to trade near 1.03 and undermine the need for any corrective bounce, wrote ING in a note.

The decoupling of the eurozone from U.S. rate spreads can see differentials stay wide, if not move wider over the coming months. Combined with rising natural gas prices, expect to stay offered, stated the bank. A decline towards the 1.0250/60 range, or potentially lower, seems probable ahead of the new tariffs.

Even though is range-bound, ING us starting to see some decent moves lower in and . In , two-year swap differentials have moved in favor of Sweden's krona (SK) as the European Central Bank is priced for another 88bps of easing this year, while the Riksbank is barely expected to cut once.

But the story seems larger than rate differentials, and like its Central and Eastern European (CEE) peers, the krona is shaking off the rise in gas prices. This resilience may be driven by growing optimism about a potential ceasefire deal in Ukraine, pointed out ING. Expectations are that the U.S. will reveal more of its plans at a Munich security conference this weekend - although any breakthrough with Russia would be a major surprise and is not priced in FX markets.

For now, however, can drift down to the 11.15 area. And Norway, benefiting hugely from the rise in energy prices, can see test and possibly break 11.50.

Former United Kingdom Bank of England Monetary Policy Committee arch-hawk and now arch-dove, Catherine Mann, speaks at 930 a.m.CET on Tuesday. ING is all interested to hear why she flipped her voting intentions at last week's BoE meeting.

An interview given by Mann to the Financial Times published Tuesday looks to largely have answered that question, added the bank. Her concern is that demand conditions are weakening, corporate pricing power is fading and there is a risk of a 'non-linear' drop in employment.

Further comments along those lines on Tuesday could see the markets firm up pricing of three further 25bps BoE cuts this year. Currently the market prices just 66bp. ING thinks is more vulnerable than , however.

This is because the euro could (EUR) get hit should the U.S. turn its attention to the EU auto sector. 1.2250 looks like the near-term target for .

The opening of the week was positive for the CEE region, added ING. Speculation about peace talks between Ukraine and Russia is filtering through to the markets regardless of the details of a possible deal.

As such, the CEE market can ignore a stronger US dollar (USD) or higher gas prices or threats of trade wars. Long positioning has been building in Poland's zloty (PLN) and Hungary's Forint (HUF) in particular for some time now so ING doesn't like to chase this rally, but for now, nothing prevents EUR-crosses going a little lower.

This should also have a positive impact on fixed-income assets where the bank can see a decent rally as well despite the negative fiscal policy picture and heavy bond issuance. The key will be the weekend security conference in Munich, which could reveal how close the sides are to some first realistic draft agreement, deciding on further direction for CEE markets.

The Norwegian krone falls after the Norges Bank confirmed that it expects to start cutting interest rates in March. Norway's central bank left its policy rate at 4.5%, as widely expected. It said restrictive monetary policy is still needed to stabilize inflation around target but that the time to begin easing monetary policy is soon approaching. "We think the path of inflation will allow the Bank to move a bit more quickly, cutting by 25bp once per quarter until the policy rate reaches 3% in the middle of 2026," Capital Economics economist Jack Allen-Reynolds says in a note. EUR/NOK rises to 11.7552 after the decision, from 11.7484 beforehand. (renae.dyer@wsj.com)