CEE FX: Risk-on bounce but policy still key – ING

§ 01 Executive Snapshot

• What: Central and Eastern European (CEE) currencies experience a risk-on bounce due to potential resolution of the US-Iran conflict.
• Who: ING's Frantisek Taborsky, Czech National Bank, National Bank of Hungary.
• Why it matters: The movement of CEE currencies highlights the influence of geopolitical events on regional markets and central bank policy decisions.

§ 02 Key Developments

• Headlines regarding a potential end to the US-Iran conflict triggered a risk-on move in the market, benefiting CEE currencies.
• The Czech National Bank is poised to hike interest rates next week, with expectations already set despite geopolitical developments.
• The National Bank of Hungary is expected to implement a baseline 25 basis point cut, with a possibility of a 50 basis point cut if the EUR/HUF rallies towards 350.

§ 03 Strategic Context

• Historical tensions in the US-Iran conflict have often influenced global markets and currency valuations, making the current situation critical for CEE currencies.
• The risk-on sentiment can lead to increased investments in emerging markets, thus affecting the economic stability and policies of CEE countries.

§ 04 Strategic Implications

• Immediate implications include a potential strengthening of CEE currencies in response to improved geopolitical conditions.
• Long-term operational implications may involve central banks adjusting their monetary policies based on inflationary pressures and currency stability.

§ 05 Risks & Constraints

• Potential risk includes a sudden escalation in geopolitical tensions that could reverse the current risk-on sentiment.
• Central banks' decisions are still constrained by existing inflationary pressures and economic conditions that could limit their policy options.

§ 06 Watchlist / Forward Signals

• The upcoming Czech National Bank meeting next week is a critical event to monitor for interest rate decisions.
• A rally of the Hungarian forint towards 350 per euro will signal a shift in the National Bank of Hungary's policy stance and potential easing measures.