ING’s Frantisek Taborsky notes that Central and Eastern European FX has benefited from improved global risk sentiment, even as elevated energy prices still imply some inflation. Markets have scaled back rate hike expectations from 2–3 to 1–2 moves since the US–Iran conflict began, while upcoming Czech National Bank and National Bank of Hungary meetings are expected to push back against hikes.

Relief rally as hikes repriced lower

"The region has seen some relief over the last two days, with better global sentiment despite energy prices remaining elevated. While current oil and gas price levels will mean some additional inflation in the region, the market is likely assuming that the dark scenarios are not materialising for now. The market has thus reduced the number of rate hikes priced in since the start of the US-Iran conflict and just this week we have moved from around 2-3 hikes across the region to the current 1-2 hikes."

"Although the market is stabilising and liquidity is returning, it is of course not possible to rule out a re-escalation of tensions and the trigger of another sell-off under the pressure of another jump in energy prices, similar to what we saw last week."

"However, for now, there is nothing else to do but go with the risk-on flow, and although we have already given all the rate cuts from our forecast in the CEE region, rate hikes still seem distant under current market conditions for us."

"We will see the Czech National Bank meeting tomorrow and the National Bank of Hungary meeting next week. In both cases, we can expect pushback against rate hikes and the market has an opportunity to receive rates here."

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