The Norwegian Krone (NOK) remains in the spotlight ahead of the decisive Norges Bank interest rate decision scheduled for Thursday at 08:00 GMT. The EUR/NOK pair is trading around 11.60, up 0.3% on the day, after hitting 11.54 last week, its lowest level in three months.

While the consensus is still for a 25 basis points rate cut to 4.00%, uncertainty remains high, fuelled by persistent core inflation at 3.1% and a solid economic outlook.

This meeting, accompanied by the publication of the monetary policy report, could provoke a strong market reaction, as Norges Bank is renowned for its surprise decisions.

A monetary dilemma for Norway

Norway's macroeconomic signals are confusing. On the one hand, inflation remains well above the central bank's 2% target, with a technical adjustment that puts core inflation even closer to 3.5% than officially announced.

"Altogether, today's [inflation] figures were stronger than expected... This raises questions about whether Norges Bank will deliver a cut next week", wrote Handelsbanken in a note relayed by Reuters, following the publication of Norway's inflation data last week.

The strength of the economy reinforces these doubts. Second-quarter Gross Domestic Product (GDP) grew by 0.6% against expectations of 0.3%, while the latest survey by Norges Bank's regional network confirmed a stable growth outlook.

"The central bank is not facing a continental economy in urgent need of easing," observes Emil Lundh of MNI Markets, who favors a status quo by the central bank.

However, other institutions still consider easing likely. ING believes that "despite sticky inflation and a solid outlook, we are still leaning towards a cut to 4.0%", stresses FX strategist Francesco Pesole.

TD Securities even speaks of a "hawkish cut", underlining the likelihood of the decision being accompanied by a restrictive outlook to limit the impact on the NOK.

The Oil factor and external flows

The Oil market, a key factor for the Norwegian currency, does not argue in favor of a stronger NOK. Brent Crude Oil prices have stagnated since the end of August, while OPEC is forecasting a further increase in supply.

According to Nordea's FX Strategist Sara Midtgaard, "demand is insufficient to absorb the entire increase, which could weigh on prices and therefore on the Krone".

At the same time, the central bank could increase its foreign currency purchases as early as next year to offset an Oil-adjusted budget deficit. On its own, this factor should support the NOK, but it risks being neutralized by the attraction of investment flows to the Eurozone, particularly Germany.

Technical analysis of EUR/NOK: An inflection point?

EUR/NOK 4-hour chart. Source: FXStreet

Since mid-August, EUR/NOK has corrected sharply downwards, falling from close to 12.00 to 11.55, a low not seen since June 20.

However, the currency pair is attempting to rebound within its short-term downtrend channel visible on the 4-hour chart. An upward breakout remains necessary before a more solid recovery can be envisaged, and possibly a new test of the resistance zone below 12.00.

Note that the upper border of the channel, currently at 11.67, is reinforced by the 100-period Simple Moving Average (SMA) on the 4-hour chart, currently at 11.69.

On the downside, a fall below the recent low at 11.54 could accentuate the downward pressure, with the next support holding towards the channel's lower bound at 11.45, then the June low at 11.41.

The NOK's next direction will depend heavily on Norges Bank's decision on Thursday. A status quo could strengthen the NOK in the short term and send EUR/NOK tumbling. Conversely, a rate cut, even if accompanied by cautious rhetoric, would pave the way for a EUR/NOK rebound.