Weakness remains in NOK

Stabilisation amid escalating geopolitical tensions

The dominating theme for markets has been a broad-based stabilisation in risk appetite. The shift is largely driven by receding US recession risks in large driven by the de-escalation of Tump’s tariffs and legal scrutiny from the US trade court. The recent escalation in the Middle East conflict has mainly manifested a response in energy markets. Despite higher oil prices, receding US recession risks, and solid US equity sentiment – typically USD positive forces – the currency continues to show structural weakness. Data shows cooling inflation and a strong labour market, in large leaving the Fed in a “waitand- see”-mode. This contrasts a more dovish stance from European counterparts, such as the ECB, the Riksbank, and notably now also Norges Bank, where the focus increasingly has shifted to growth challenges and the room for easing policy.

Over the past month, the USD has struggled to find persistent support, despite geopolitical tailwinds, due to compelling negative structural forces, with EUR/USD trading around the 1.16 level. The stabilisation of economic conditions has favoured cyclically sensitive currencies like AUD and CAD. While NOK saw temporary tailwind from rising energy prices and trade easing, the unexpected rate cut from Norges Bank lifted EUR/NOK above the 11.65 mark EUR/SEK has moved higher on weak growth data, lower-than-expected inflation, and the June rate cut. EUR/GBP has edged higher, driven by rising signs of weakness in the UK economy and its role as a mini-USD.

Outlook: Negative on the USD and Scandies

We are still positive on EUR/USD in both the near- and medium term, now targeting a gradual move toward 1.22 over a 12M horizon. In the near term, higher oil prices and stretched short USD positions may lead to uneven dollar depreciation. Longer term, structural challenges like US and euro area political shifts, trade uncertainty, and capital rotation out of US assets suggest significant USD downside. We maintain an upward sloping forecast profile for EUR/NOK, as we see oil support to NOK as a temporary driver and expect a return of headwinds from relative rates and structural challenges. Despite SEK benefits from US-Europe rotation flows, weak growth acts as a SEK negative, leading us to maintain a positively sloping profile for EUR/SEK, with estimates adjusted slightly towards 11.30 over the next 12 months to reflect the Riksbank's dovish cut.

Risks to our forecasts are predominantly tied to the US outlook and the Middle East conflict. If the capital rotation out of US assets continues and a sharp US recession hit, EUR/USD could break substantially higher than our forecast suggests. In this environment, commodity currencies would also face a larger hit. Conversely, persistent resilient US data could make the USD regain strength. Furthermore, elevated oil prices could offer more near-term USD tailwind.

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