ING’s Frantisek Taborsky warns CEE currencies face downside as the Iran-related energy shock hits an import-dependent region. Higher Oil and gas prices and a stronger Dollar are expected to weigh on CEE FX and delay rate-cut plans. Hungary and Turkey are highlighted as most exposed, with EUR/HUF likely to see the strongest upward pressure and USD/TRY kept in check by the central bank.

Energy shock and positioning weigh on CEE FX

"The conflict in the Middle East is affecting the CEE region mainly through energy prices due to its energy import-dependency and heavy price-taking factors. While it is difficult to estimate the development of global energy prices at this point, it is clear that this will be a one-way street for the market at the opening. Therefore, we generally expect CEE currencies to come under pressure due to risk-off sentiment and rates receivers due to higher inflation expectations through higher oil and gas prices and a stronger US dollar."

"In terms of inflation sensitivity to higher oil prices, we see Turkey as the most exposed (10% oil price increase translates into 1.1ppt in CPI) and Hungary (0.45ppt). On the other hand, the Czech Republic shows the lowest pass-through (0.2ppt). However, it can be assumed that central banks considering imminent rate cuts in the region (which is all except Romania) will instead wait and see for now."

"The first test will be the National Bank of Poland on Wednesday, where we expected a rate cut before the conflict began; this seems rather unlikely from today's perspective."

"Within the region, we expect the Hungarian forint and Turkish lira to be under pressure as the most long currencies. The Central Bank of Turkey already announced its readiness on Sunday, as well as new intervention in the forward market, and at the same time it is entering the stress period with record FX reserves."

"Therefore, we expect USD/TRY to remain under the control of the central bank. EUR/HUF is likely to see the most upward pressure within the region."

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