Central European Currencies Recover As Dollar Loses Steam

What’s going on here?

Central European currencies, including Poland’s zloty and Hungary’s forint, are poised to end their three-day slump, gaining strength against a previously dominant dollar.

What does this mean?

After taking a hit earlier this week, the forint strengthened by 0.2% to 394.70 per euro, recovering from an almost eight-week low. Similarly, the zloty rose by 0.1% to 4.336, bouncing back from a near two-month low. The Czech crown also climbed 0.2% to 24.689 per euro, buoyed by solid consumer recovery and wage growth. As investors keep a close eye on upcoming US inflation data and the Federal Reserve’s meeting, Central European central banks have mostly paused or slowed interest rate cuts due to persistent inflation concerns. Notably, Romanian inflation data showed an unexpected slowdown in May, potentially prompting its central bank to cut rates in July.

Why should I care?

For markets: Strength in numbers lifts regional stocks.

Regional stock markets reflected this currency strength: Prague’s PX index inched up by 0.15%, Budapest’s BUX increased by 0.92%, Warsaw’s WIG20 gained 0.58%, and Bucharest’s BETI rose by 0.35%. Bond yields showed mixed results, with Czech 2-year yields at 4.208% and Polish 10-year bonds yielding 5.713%.

The bigger picture: Central banks play it safe.

Central European policymakers’ cautious approach reflects broader economic uncertainties. The US consumer price index is expected to see modest growth, with core CPI potentially rising by 0.3% in May. An asymmetric reaction for the zloty is anticipated based on these CPI figures – moderate strengthening with lower core CPI, but a risk of weakening if it hits 0.4%. Markets will also closely examine the Fed’s ‘dot plot’ projections, which could indicate future policy directions amid global inflation concerns.