Summary and conclusions

• This week we take a step back from the global issues and focus on the near-term outlook for the GBP and NOK. In the UK, we see a more than 50% chance of a rate hike next week. The surprise minority call for a rate cut at the March meeting was probably a false alarm as economic news since then has been strong, just as the sell-off in equity markets has ended. Admittedly, whether the Bank of England delivers in April or May is likely to be a finely balanced decision, and perhaps a more relevant question is whether there is more than the one rate hike priced by the short sterling strip left in this cycle. Since the policy tightening already under the BoE??™s belt has yet to slow spending or the housing markets, it may seem a little premature to call the end of the policy cycle. A rate hike, or simply a rise in forward rates, will be supportive of GBP.
• Oil prices have been more important to the NOK in recent years than, say, relative interest rates. So far, the significant rise in oil and gasoline prices since January seems to have gone almost unnoticed by currency markets. But the fundamental case for oil remains strong and will continue to argue for a stronger NOK. We also continue to see policy rates rising to 5.0% by end-07. This suggests that the NOK will increasingly become a carry currency. We recommend buying NOK this week.