Czech Koruna: Narrowing rate gap weighs on koruna versus Euro – ING

ING’s Frantisek Taborsky highlights that a less hawkish Central and Eastern European rates outlook is undermining Koruna strength. Markets have scaled back expected hikes in Poland and the Czech Republic, while Hungary is priced for sizeable cuts. He expects inflation divergence and a tighter rate differential versus the Euro and Zloty, leaving EUR/CZK biased higher after touching 24.25.

CEE repricing pressures koruna

"Markets in the CEE region have seen some relief in the last two days, along with global markets, with investors backing off from pricing roughly four hikes in Poland and the Czech Republic to roughly two to three hikes over a one-year horizon now."

"At the same time, Hungary has deepened its pricing of rate cuts after Tuesday's dovish National Bank of Hungary meeting, and at this point, nearly 115bp of rate cuts are expected over the same horizon."

"From this perspective, Friday's inflation in Poland will be interesting, where we have seen the biggest jump in CEE so far. May's numbers should move us to 3.7% year-on-year, the highest since June last year and above the National Bank of Poland's tolerance band."

"For now, our economists do not expect a rate hike this year, but from a CEE perspective, the NBP seems the riskiest at this point. In turn, it seems that further relief in oil prices may not necessarily bring further rate cuts in Poland, given that the real rate should reach neutral levels in May and probably turn negative in June."

"The Czech National Bank may be on hold for a longer period due to lower inflation prints in the coming months, and we should see visible inflation divergence between Poland and the Czech Republic emerging in the summer months. Together with an expected ECB rate hike in June, this does not put the koruna in a comfortable position."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)