CEE Currency Outlook Clouded by Hawkish Market Pricing

The Central and Eastern European (CEE) foreign exchange market is bracing for a busy week of data releases and policy decisions. According to ING's Frantisek Taborsky, Hungary's inflation is expected to edge up from 1.2% to 1.4% in August, while the National Bank of Poland and Central Bank of Turkey are likely to keep rates unchanged at 3.75% and 37%, respectively.

The Czech Republic's CNB blackout period starts on Thursday, which could lead to more hawkish market pricing being unwound. Taborsky believes that markets have overpriced tightening in the Czech Republic and Poland, seeing scope for narrower rate differentials and moderate CEE currency weakness, especially in EUR/CZK and EUR/PLN.

The ING analyst notes that rates repricing will weigh on CEE FX, particularly if the CNB delivers a dovish surprise this week. With regional rates rallying last week after global relief, expectations of rate hikes in both countries have been reduced, but markets still price around 80bp of tightening.