Weakness remains in NOK

Danske Research Team Danske Bank A/S

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.

Download The Full Market Guide

Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.