Renewed geopolitical tensions and rising oil volatility have reconnected EUR/NOK with crude dynamics, setting the stage for potential NOK strength if supply risks escalate, Société Générale's FX analysts Olivier Korber and Kit Juckes reports.

Geopolitical risks revive crude-NOK correlation

"Since September, EUR/NOK has reconnected with oil dynamics. Renewed geopolitical tensions in the Americas and Iran have injected fresh volatility into crude markets, and the rebound from $60/bbl looks more like a starting point than a peak. Our commodity team highlights that a full disruption of Iranian supply, even for a week, could lift oil prices by at least $15/bbl. Such a scenario would materially strengthen NOK."

"December’s underlying inflation surprised to the upside at 3.1% vs. 3.0% expected, reinforcing the central bank’s cautious stance. While growth is projected below trend, persistent price pressures limit the scope for aggressive rate cuts. Markets remain reluctant to price more than half a cut in 1H, and stickly inflation doesn’t suggest a dovish Norges Bank. The central bank cautiousness should underpin NOK resilience."

"NOK/SEK has been trading near multi-year lows just above 0.91, suggesting a technical floor. With downside potential likely capped in this cross, NOK’s vulnerability across the board looks contained."