Norway’s stronger-than-expected inflation data has supported the Norwegian Krone and raised doubts about further easing by Norges Bank. Front-end yields have risen after both CPI and core inflation exceeded forecasts.
EUR/NOK is trading near key support levels, with last week’s low at 11.3610 and the pre-Liberation day low at 11.2614. The move follows the inflation surprise and the change in rate-cut expectations.
Inflation Surprise Lifts Krone
CPI rose to 3.6% year on year in January, up from 3.2% in December, versus a 3.0% consensus forecast. Core inflation increased to 3.4% from 3.1%.
In its January statement, Norges Bank said inflation was too high. The article was produced using an AI tool and reviewed by an editor.
The surprise jump in Norwegian inflation changes the game for us. With both headline and core inflation overshooting forecasts, the market’s hope for a near-term Norges Bank rate cut is quickly fading. We should position for a central bank that is now more likely to hold rates steady, or even signal a hike.
For those in FX options, this strengthens the case for NOK appreciation against the Euro in the coming weeks. We should consider buying EUR/NOK puts or establishing put spreads to target a break of the 11.36 and 11.26 support levels. The increased front-end yield volatility suggests that option premiums may rise, making defined-risk strategies attractive.
On the rates side, the sharp jump in front-end yields indicates the market is repricing Norges Bank’s path. We can use short-term interest rate swaps or forward rate agreements to bet on policy rates remaining higher for longer. This is a direct play on the idea that rate cut expectations were premature.
Positioning For Higher For Longer
We saw a similar dynamic in early 2025 when core inflation proved sticky, staying well above 4.5% even as the market tried to price in cuts. Back then, Norges Bank held firm at its 4.50% policy rate, causing the Krone to rally. This historical precedent from last year suggests we should not bet against the central bank’s resolve this time.
The backdrop of a tight labor market, with unemployment holding below 4% through the end of last year, gives the central bank even more room to stay hawkish. All eyes will now be on the next Norges Bank meeting in March to see if their rhetoric hardens significantly. Any positions should be structured with that key date in mind.
