ING’s Frantisek Taborsky reports that Central and Eastern European FX remains relatively stable despite renewed rate market selling in Poland and the Czech Republic. Governments signal readiness to intervene in energy markets if needed, and central banks see current energy prices as manageable for inflation, implying a high bar for rate hikes while elevated differentials help anchor currencies.

Energy risks but FX stays contained

"After Wednesday's relief, the CEE market returned yesterday to sell-off mode under the influence of global sentiment. Rates receivers came under pressure again and saw another wave of selling, with Poland and the Czech Republic underperforming the most."

"Still, differentials remain at elevated levels after the previous move and should keep FX under control in the coming days."

"Further developments obviously depend on the duration of the US-Iran conflict and the development of energy prices, which remains uncertain."

"At the same time, we see comments from governments across the region signalling readiness to intervene in the energy market if prices were to be passed on to consumers."

"Therefore, it can be assumed that the impact of energy prices on inflation should be within acceptable limits and the bar for central bank rate hikes is very high, also because FX remains stable for now."

"The rates market should therefore have a ceiling where outpricing of rate cuts makes sense, but pricing in rate hikes should only come when we see a significant escalation of the conflict."

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