FX markets continue to trade in a mixed fashion as traders grapple with uncertainty over interest rates and economic growth. The US dollar is caught between the prospects of resilient US growth and lower market interest rates. Recent US data releases have shown decent growth and benign inflation, supporting the view that the Federal Reserve can adopt a less restrictive monetary policy. However, the European Central Bank's President Christine Lagarde's comments about the possibility of rate cuts this summer have caused the EUR/USD exchange rate to decline. In the Central and Eastern Europe (CEE) region, the National Bank of Hungary's upcoming meeting has raised uncertainty about a potential rate cut and a proposal to change the money market rate BUBOR. Despite this uncertainty, the CEE region is experiencing a rally supported by a fresh wave of buyers in the rates market. The Polish zloty has the potential to rally, but its upward movement may be limited by a stronger US dollar. The EUR/CZK exchange rate is expected to remain within a range. Traders and investors are closely monitoring these developments in the foreign exchange markets, particularly the US dollar, European Central Bank, National Bank of Hungary, and the overall CEE region.
US inflation is a key factor influencing the FX markets. Core US CPI inflation is expected to be in line with the consensus of 0.3%, but there is a possibility it could be lower. A declining real policy rate would be increasingly hard to justify if the American economy starts to cool. The US dollar is facing asymmetrical risks skewed to the downside this week.
In the CEE region, Romania is expected to keep rates unchanged, and the Polish zloty (PLN) is expected to see new gains. The National Bank of Romania is expected to stay on hold and defer the first rate cut to the second quarter of 2024. The RON market is not expected to see much change. EUR/PLN is expected to test 4.300 again this week.
Traders and investors are also closely watching the European Central Bank (ECB) as it focuses on inflation rather than growth. The ECB is unlikely to change its narrative even if the economic outlook deteriorates slightly.
The European economy has experienced a lack of development over the past year due to high interest rates, the collapse of the Chinese economy, and a slowdown in the manufacturing industry. The German economy, known as the 'Engine of Europe,' has seen a rapid decline. The prolonged high-level inflation in Europe has suppressed demand. The Consumer Price Index (CPI) in Europe surged to 10.6% in November 2022 and gradually declined to 2.4% in December. However, in January, the CPI rebounded to 2.9%. The future direction of the European economy will primarily hinge on the European Central Bank's (ECB) interest rate path. The ECB's firm stance towards monetary policy, particularly its hawkish approach, may exacerbate the market's disappointment over a rate cut. Traders should pay attention to the Federal Reserve's monetary policy position, European inflation data, and the future direction of the European economy to understand the euro's future trajectory.
Hungary's forint has recently hit a record low against the Polish złoty. Over the past six months, the forint has fallen by 6% against the złoty, reaching its lowest level on record. Concerns about the independence of Hungary's central bank and Warsaw's improving relationship with the EU have contributed to the forint's decline. The European Commission recently decided to release Poland's €137bn in frozen EU funds after determining that Warsaw had made efforts to restore the rule of law. Hungary's rate cut has narrowed the gap between the two countries' borrowing costs, while Poland's central bank has been reluctant to reduce rates. The złoty has been one of the best-performing major currencies globally, rising 9.5% against the dollar, while the forint has been among the 10 worst, down 3.9%.
Traders and investors are closely monitoring the developments in Hungary's forint, the Polish złoty, and other Central European currencies, as well as the release of EU funds and the ongoing discussions about interest rates in the region. These factors will continue to influence the foreign exchange markets and the overall economic outlook in the CEE region.