Downward price action is likely for USDNOK in the coming weeks, but the bigger picture favors the upside, and a long set-up seems to be emerging now that has both technical and fundamental merits.

In the short term (1-8 weeks), the technical outlook for the US dollar (USD) against the Norwegian krone (NOK) is negative, as we have seen lower highs and lower lows since USDNOK peaked in July. However, with the pair oversold in the short term, the risk remains to the upside from currents levels. Longer term (2-12 months), the chart is positive, as we have higher lows and higher highs (see chart).

Guest Commentary: Technical Outlook for USD/NOK

Support: 5.70, 5.60, 5.50

Resistance: 5.90, 6.00/6.05, 6.15

USDNOK has seen a deeper correction since the July peak above 6.25. We did see a bigger move up after the 50% retracement was hit in August around 5.85, but the pair failed to maintain that momentum. Since then, we have seen a fast selloff to the 61.8% retracement level around 5.73-5.75.

Yesterday (September 19) saw a massive move, as the pair closed higher on the day and posted a hammer candlestick. This might signal a possible bottom from current levels. The low end of yesterday’s range was also the bottom of the trend channel we have established since the peak in July.

Furthermore, the stochastic indicator shows a bounce up from oversold levels (below 20), and we should see some upside traction in the next couple weeks. Based on the trend channel, we might see a move up against the top of the range around the 6.00-6.05 area, which is also a 61.8% retracement from the July high and possible low in September.

In the longer term, USDNOK has put in higher lows and higher highs. This favors a possible bounce up from current levels, but we need to see the pair close and hold above critical levels such as 6.05 and 6.15 in order to challenge the 2013 highs. If it fails to do so, we might establish a more horizontal trend in the upcoming months.

To conclude, from a pure price-action point of view, the short-term trend is negative, as we have lower highs and lower lows, but we have hit some important levels, including the 61.8% retracement around 5.73/5.75. That is where buyers came in and ended the day (September 19) with a hammerstick, which favors a possible bottom at current levels. The coming weeks will be critical for USDNOK and will likely give us more guidance before the next big move.

Fundamental Factors in Play for USD/NOK

Given the combination of softer macro numbers from the US and stronger-than-expected inflation in Norway, we have seen a stronger krone over the last couple weeks. After the Federal Reserve surprised the markets by delaying tapering, we saw the dollar trade lower against most currency counterparts.

Furthermore, the krone strengthened after the Norges Bank left interest rates unchanged at 1.5% at the latest monetary policy meeting. This move was later reversed, however, when the market realized it was a dovish twist on the report despite higher inflation. The rate path in Norway was adjusted up, in line with market expectations, though not as aggressively as the market rate had priced in.

Since early summer, the focus has shifted away from risk due to the slowdown in Asia and in favor of risk from weaker US economic performance, which was the main reason tapering was withheld at this week’s Federal Open Market Committee (FOMC) meeting.

If US economic data continues to be soft, we might see further delays to tapering, and a weaker USDNOK as a result. There are two Fed meetings remaining this year—October and December—although it’s uncertain whether the fiscal situation will be much clearer in October.

See also: A Fed Taper Scenario Few Expected

When it comes to Norwegian growth, we have already experienced a slowdown, and the export industry is suffering due to a stronger krone, although we also see that the Norwegian market rate is somewhat stretched, which favors a weaker NOK.

Erna Solberg, likely Norway’s new Prime Minister, has said she would work to weaken the krone in order to boost competiveness. This is in line with an earlier statement from Norges Bank, which convinced the market that significant NOK appreciation is not acceptable because it hurts the nation’s export industry. With this in mind, the bigger players in the market might not consider NOK the safe haven it used to be.

As you can see, we have a lot of uncertainty coming in the weeks and months ahead. While we need more numbers and guidance from both the Fed and Norges Bank, overall, the US economy is on a decidedly better path than that of Norway, and stronger US growth and development supports a stronger USDNOK in the big picture.

Trade Idea for USD/NOK

Buy one third of the desired position at current levels (5.80+) and monitor price action for a buy entry order around 5.75-5.78. The stop loss should be executed if the pair closes below 5.70, as this would confirm that our hypothesis was wrong.

The price target for this trade is the 61.8% retracement level around 6.05. If the pair closes above 5.95, the stop should be moved up to the average entry price in order to protect the downside.

By Rafiul Hossain, Guest Analyst, DailyFX.com