Trading GBP/NOK

The GBP/NOK exchange rate dynamic has been one of interest to many UK investors, especially in relation to oil, one of Norway’s largest commodity exports. Before we explore correlations and forecasts, we’ll outline the key advantages and disadvantages of day trading this exotic cross, plus techniques to use in the challenging forex market.

GBP/NOK Explained

The GBP/NOK exchange rate determines how many Norwegian kroner (NOK) to the British pound (GBP). The GBP/NOK quote is a cross currency pair which is popular among experienced traders.

The price movement of the pair is determined by the UK and Norwegian economies, with some dynamics owing to correlated currencies and commodities such as Brent oil. We’ll explore these later, but first, let’s take a look at the individual historic events that precede today’s performance of both currencies.

The British Pound

After the US dollar, the euro and the Japanese yen, the pound sterling is the fourth most traded currency in the world and the fourth most popular reserve currency.

The modern sterling currency was first established at the end of the 17th century when the Bank of England was founded. During the British Empire era, the sterling was widely used around the world.

After World War I, the UK economy and the sterling took a significant hit after accumulating immense national debt. In 1940, the sterling was pegged to the US dollar in the Bretton Woods system, though it became a free-floating currency in 1971 when the system collapsed.

The following years saw the sterling’s performance dip periodically due to budget deficits and austerity during the Thatcher premiership, plus political uncertainty around joining the eurozone.

The Norwegian Krone

Introduced in 1875, Norway joined the Scandinavian Monetary Union alongside Denmark and Sweden, whereby the Norwegian krone was introduced. Within the union, the krone was on a gold standard, though this was suspended permanently in 1931. It was then pegged to the British pound at a rate of 19.9 kroner to 1 pound.

In 1939, the krone was temporarily pegged to the US dollar, though during the German occupation (1940 – 1945), it was pegged to the German Reichsmark. After the war, a rate of 20 kroner to the pound was established. In 1992, the Central Bank of Norway abandoned the fixed exchange rate, moving the krone to a floating exchange rate.

The substantial variation in the value of the krone each year is largely attributed to changes in oil prices and interest rates. In 2002, it reached a record high against the US dollar and euro, at $1 = 8.98 NOK. At this time, interest rates were increased to 7% and oil prices were high, with Norway being the world’s third-largest oil exporter.

The krone grew even stronger in 2005 when oil prices reached record levels of over 60 dollars per one barrel and even though interest rates decreased to around 2%, the krone grew stronger. Throughout 2007 and 2008, when the US dollar weakened against all major currencies, the krone became stronger. This growth continued until 2019, when $1 was equal to around 9 NOK, before depreciating again due to the Coronavirus pandemic.

Trading GBP/NOK: Pros & Cons

There are a number of advantages and limitations that you will need to consider before jumping into a trade with GBP/NOK:

Pros

• Relatively stable economy – The Norwegian economy enjoys good development and industrial growth, particularly with shipping and exports of natural resources and oil. This attracts foreign investors who seek to invest their capital into healthy economies.
• Volatility – Cross pairs such as GBP/NOK can offer higher potential returns due to volatility, as traders will look to take advantage of the dramatic price swings. Futures, options, ETFs and other instruments can be used to capitalise on forex volatility.
• Unique opportunities – Because of its low liquidity, GBP/NOK might offer exposure that you wouldn’t otherwise get with major pairs. For example, a unique political event in Germany or the UK (key trade partners) might threaten trade with Norway, thus affecting the performance of NOK.

Cons

• Trade and diplomatic tensions – Ongoing trade pressures and sensitive diplomatic fallouts between Norway and China have caused uncertainty in the price movement of NOK. Brexit uncertainty will also impact the Norwegian export sector.
• Oil correlation unclear – Although the price of Brent oil has sometimes been used to explain movements in the krone, recent years have seen otherwise. In fact, the krone now seems to react more strongly to a fall in the price of Brent, rather than a rise. This ambiguity has previously caused confusion in the market.
• Low liquidity and volume – NOK makes up a smaller share of the market and is thinly traded compared to other major currencies. This means that when risk sentiment is weak, traders will prefer to stay away from NOK. Less liquidity also means a greater risk of slippage but also wider bid/offer spreads.
• Volatility risk – Whilst volatility offers opportunities to realise profits from sharp pound to NOK price swings, this can also mean a greater risk of loss.

What Factors Affect GBP/NOK?

UK Factors

In the UK, there is more emphasis on the services sector, trade, industry and tourism, than on agriculture. It also has a highly developed social market and is the fifth-largest national economy in the world in terms of Gross Domestic Product (GDP). In 2019, the UK was the fifth-largest exporter and importer in the world.

The services sector contributes around 80% of GDP, particularly the financial services industry, with London being the second-largest financial centre in the world. The aerospace and pharmaceutical industries also play an important role. The UK has been a net importer of North Sea oil and gas since 2005.

When trading GBP/NOK, traders should keep an eye on GDP and general economic growth attributed to any of these industries or sectors. GDP reports are usually quarterly and can give you a good indication of the economy’s overall health.

Information on prices and inflation can be found within the Consumer Price Index (CPI), whilst interest rate decisions are determined by the Bank of England. You can also gauge confidence and sentiment in the market, using national reports and surveys.

One of the largest factors impacting GBP in recent years has been political events, specifically the state of the economy after the Brexit negotiations. General news reports and outlets are ideal for this kind of information.

Norwegian Factors

Overall, Norway has a strong and well-developed economy, with certain parts heavily owned by the state. The export sector is strongly supported by shipping, though the most prominent growth stimulants include natural resources, such as hydroelectric power, fisheries and petroleum.

In fact, oil and energy account for nearly 30% of total government revenue. The majority of petroleum revenue is placed in Norway’s sovereign wealth fund, which is valued at over $800 billion and is the largest such fund in the world. Norway also ranks in the top 10 globally in the exportation of oil and natural gas products.

Norway’s most notable international trade partners are Germany, the UK and Sweden. The value of total exports of goods and services represent 38% of Norway’s annual GDP. Norway also ranks 11th in GDP per capita globally. It is therefore wise to understand economic developments in these nations to gauge any potential swing in GBP/NOK.

Norway also has a very high standard of living and a strong welfare system, in comparison to other European nations. It’s therefore worth looking out for national surveys, reports and statistics relating to the labour market, as well as confidence and sentiment.

How To Day Trade GBP/NOK

Trading this cross pair is not for the faint-hearted, so traders should implement a range of tools and strategies to best understand the behaviour of the GBP to NOK rate. Some of the best platforms to analyse exchange rates on are IG and Pepperstone, though it’s worth doing further research to find other suitable options.

Technical Analysis

To start analysing the price of GBP vs NOK, you will need to employ technical analysis strategies using a live chart. Technical analysis allows you to analyse the exchange rate history of GBP/NOK and therefore make a prediction or forecast on the future price movement.

You can find GBP to NOK price history using a standard real-time candlestick graph, which indicates the bullish and bearish trends with opening and closing prices. You can set a number of time intervals to accommodate a short-term or long-term outlook, depending on your strategy.

Once you’ve familiarised yourself with this, you can then apply chart overlay tools such as Fibonacci retracement, trend lines, moving averages and Bollinger Bands. You can find live rates and technical indicators on many platforms, including TradingView, XE and Yahoo Finance.

Fundamental Analysis

Traders should complement their technical strategies with fundamental analysis, which focuses on the overall state of the economy, plus financial, social and political factors that might impact the currency they relate to. As such, fundamental analysts generally take a longer-term view of the markets.

Experts trading GBP/NOK will therefore observe news reports, political events and economic indicators that can suggest a boost or decline in the Norway or UK economy. Most platforms will include an economic calendar where you can keep track of such updates, but it’s also worth following other outlets such as Bloomberg or Reuters.

Automated Trading

Trading robots are another popular tool among day traders and are widely offered on platforms such as MetaTrader 4 and cTrader.

Trading robots use algorithmic technology based on signals, which automatically enter a trade for you and eliminate emotional bias. Some traders also opt for copy-trading signals, which are provided by other traders.

Whilst these can be useful tools for traders of any experience level, they are not always reliable or trusted. Many scams operate in this area, so it’s wise to really consider whether you will benefit and if so, ensure you have properly researched the one you are using.

GBP/NOK Correlation

A correlation between two assets or currency pairs is based on the premise that if one moves up or down, the correlated asset will either directly or inversely move as well. As such, it is possible to encounter both positive and negative correlations in forex.

For example, EUR/USD and GBP/USD usually have a positive correlation because of the close relationship between the euro and the pound (both in terms of their geography, as well as their status as top reserve currencies).

GBP/NOK is positively correlated with USD/SEK (US dollar and Swedish krona) and negatively correlated with EUR/USD (euro vs US dollar). As discussed earlier, the correlation between NOK and oil is no longer a clear enough picture. This highlights the importance of not basing your analysis on just one factor.

Risk Management

Money management techniques should be used throughout your day trading activities, regardless of your experience level or the strategy you are using. Without tools in place to protect your investment, you will have nothing to fall back on if the market moves against you.

Once you fully understand the different types of risks at play when trading GBP to NOK and other instruments, you should then look to utilise a risk calculator to determine key factors such as position size and risk-reward ratio.

Stops and limits are also essential tools that will pull you out of a trade when the market moves against you, or when your trade reaches a desired profit level. Many traders have fallen into the trap of assuming that a previous successful trade will precede a pattern of future gains. This gambling mindset is exactly what risk management tools are designed to protect against.

Session Times

The GBP/NOK pair is likely to be more active and volatile between 08:00 and 16:00 GMT, when the British and European markets are open, with the most volatile day being Wednesday. Traders should also bear in mind the strength of correlated pairs will vary during certain periods of the day.

Note that trading outside of these hours will involve higher spreads or commissions, as brokers will charge more during periods of low liquidity.

Final Word On GBP/NOK

Trading GBP against NOK can present exciting opportunities, though these will not be as straightforward as the likes of EUR/USD and other majors. The low liquidity of the exotic cross, compared to some of its major counterparts, can be risky to the inexperienced trader. The quality of your technical analysis and commitment to keeping on top of economic news will be your key considerations here, alongside solid risk management tools.

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