Talking Points:

• Sizable Retracement from Recent Highs
• Key Support and Resistance Levels
• Fundamental Factors Favor the Upside
• Long Trade Idea for USD/NOK

After USDNOK hit our 6.05 price target from our prior research, we have seen a healthy retracement before a bigger possible move in the upcoming weeks. The bigger picture still favors the upside, and is supported from a technical and fundamental point of view.

Over the last couple weeks, the US dollar (USD) has strengthened against the Norwegian krone (NOK), and the pair peaked just above the 6.07 level, which is also the top of the current trend channel that’s been established.

Since then, we have seen a healthy, 61.8% retracement from the September lows to the recent high above 6.07. Furthermore, the pair has reacted positively from oversold Stochastic levels, which supports a stronger USDNOK in the upcoming weeks.

Guest Commentary: Technical Outlook for USD/NOK

Support: 5.85-5.83, 5.70, 5.60

Resistance: 6.00-6.05, 6.10, 6.20

In addition to the 61.8% retracement from the early-October high, the Stochastic has also bounced up from oversold levels (below 20 on the daily chart) and favors a decent bounce up from current levels around 5.90. However, price action has yet to give any clear signal regarding future direction, but upside potential would be likely based on the current retracement and bounce up from oversold Stochastic levels.

Furthermore, if USDNOK fails to get some traction on the upside upcoming weeks, we have established healthy support levels around 5.85 and 5.70. Based on the price action since the bottom in September, those levels will be protected by those who remain long the dollar against the Norwegian krone.

On the upside, we have stern resistance in the 6.05-6.07 area, which is also the top of the current trend channel established over the last couple months. A break above this resistance area could clear the way for a challenge of the 2013 highs above 6.25, although that would entail breaks of resistance at the 6.10 and 6.15 levels as well.

In the longer term, USDNOK has put in higher lows and higher highs, which favors a possible bounce higher 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 the pair fails to do so, USDNOK may establish a more horizontal trend in the months ahead.

Fundamental Factors in Play for USD/NOK

Norges Bank left interest rates unchanged at 1.5% at its October monetary policy meeting. The rate path was unchanged, and Norges Bank wants to see more macro numbers before adjusting the current path.

However, recent macro numbers including the latest inflation data has been soft, which poses a greater risk for a longer period of low interest rates. That in itself supports a weaker NOK in the long run.

Furthermore, Norges Bank has again made it clear that significant NOK appreciation is not acceptable because it would hurt 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, and that thesis is also supported by the lower liquidity in the pair over the last couple months.

Trade Idea for USD/NOK

Traders looking to capitalize on future upside in USDNOK can buy half the desired position at current levels (5.90+) and monitor price action for a bottom confirmation. If successful, buy the rest of the position and use a stop loss if a close below 5.83 occurs. The first price target is set to 6.05 and the second is at 6.20.

If or when the first price target is reached, the stop loss should be moved above the average entry price or 5.95 in order to protect the downside risk. We can even consider selling half the position at the first target price in order to lock in some profits.

By Rafiul Hossain, Guest Analyst, DailyFX.com