ING’s Frantisek Taborsky notes weaker US data and a softer Dollar helped Central and Eastern European (CEE) currencies, but focus now shifts to local inflation and central banks. He expects slightly softer-than-forecast inflation in Hungary and the Czech Republic, a dovish National Bank of Poland (NBP), and warns that lower inflation and dovish tones could pressure CEE FX near term, while keeping a medium-term bullish view on Czech Koruna (CZK) and Hungarian Forint (HUF) and bearish on Polish Zloty (PLN).

Local inflation and dovish central banks

"Weaker US labour data and a softer dollar gave CEE currencies some breathing room last week, shifting this week’s focus back to local drivers. June inflation figures for Hungary and the Czech Republic are due tomorrow. After the downside surprise in Polish inflation last week and the sharp fall in fuel prices, markets are positioned for soft prints."

"In Hungary, we expect headline inflation to edge up from 1.8% to 1.9%, below the National Bank of Hungary’s 2.0% forecast. In the Czech Republic, inflation should fall further from 2.1% to 1.9%, below the Czech National Bank’s 2.1% projection. Both readings should send a dovish signal to markets."

"A similar message is likely from the National Bank of Poland, which is expected to leave rates unchanged at 3.75% on Wednesday and publish a new forecast. While the projection should show higher inflation than in March, when the impact of the US-Iran conflict was not included, the press conference is likely to sound dovish after two consecutive downside inflation surprises."

"A softer dollar supported a rally in CEE FX last week, and positive sentiment should carry into this week. However, lower inflation prints in Hungary and the Czech Republic, together with a dovish tone in Poland, could weigh on local FX."

"In the short term, CEE FX may face some pressure, but the medium-term bias remains unchanged: bullish CZK and HUF, bearish PLN."

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