ING’s Frantisek Taborsky warns that a stronger Dollar and lingering Fed hike risks are pressuring Central and Eastern European currencies. Weaker FX raises inflation concerns for open CEE economies just as higher Oil and food prices loom. Market pricing has reduced rate-hike expectations in Poland and Czech Republic while increasing rate-cut bets in Hungary.

Fed risk and inflation challenge CEE FX

"The strong US dollar is becoming a visible problem for the entire EM space, including CEE currencies. The risk of a Fed hike has long been one of the biggest risks for the CEE region, not only from an FX perspective but also from a central bank perspective. Weaker currencies obviously mean additional inflationary pressures for the significantly open economies of Central and Eastern Europe. At the same time, this is the last thing central banks want right now, when the second-round impact of higher oil prices in the last three months is still unknown. We should potentially see higher food prices across the region in the second half of the year due to higher fertiliser prices and a turnaround in global food prices."

"At the same time, the market is reacting to falling oil prices and pricing out potential rate hikes in Poland and the Czech Republic, and increasing rate cut bets in Hungary. In the Czech Republic, the market is keeping one hike, in Poland about half a hike and in Hungary about 150bp of easing. While in Hungary we may see more rate cuts priced in, in the Czech Republic and Poland we see this as the minimum possible at this point."

"Conversely, the pressure on FX may bring rate hikes back into play, although our baseline is no change in the Czech Republic and Poland this year. The increasing probability of a Fed hike also means an increasing probability of rate hikes from the CNB and NBP and fewer rate cuts from the NBH."

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