Dec 23 (Reuters) - Friday's sharp drop in USD/NOK and EUR/NOK could shape a better-than-expected holiday week for Norway's crown.

The Norges Bank left its key rate unchanged at 4.5% last week but the accompanying statement had a slightly dovish bias, which leaned on the crown.

USD/NOK climbed to highs not seen since the Covid pandemic on Thursday and put in another new trend high on Friday of 11.4680. However, the dollar relaxed its grip as U.S. inflation expectations were marked down. A sharp USD/NOK pullback to 11.3269 by Friday's close helped form a bearish engulfing candlestick, a strong trend reversal signal if confirmed today. On the daily bar chart, Friday's action took the form of a key day reversal, a higher high, lower low and close below the previous close.

The NOK is still at risk as Norwegian pension and insurance funds need to sell the crown to maintain their FX hedging ratios following the recent fall in U.S. stocks. Thinning holiday market liquidity could also magnify any such hedging and other year-end flows out of the currency.

If the NOK reversal holds and USD/NOK posts a bearish close on the week, the market could target key Fibonacci retracement levels early in 2025. The 38.2% and 50% retracements of the 10.8260-11.4680 Nov-Dec bull run are at 11.2228 and 11.1470, respectively.

For more click on

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ USD/NOK daily candle chart:

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

(Peter Stoneham is a Reuters market analyst. The views expressed are his own, editing by Ed Osmond)

((peter.stoneham@thomsonreuters.com))