ING strategist Frantisek Taborsky reports that Polish inflation surprised to 3.4% on higher fuel prices, while food prices fell, and a busy data calendar looms for Central and Eastern Europe. He notes regional markets have shifted back into hawkish mode after recent Federal Reserve comments and geopolitical tensions, with Czech and Polish curves pricing multiple hikes, which should limit further CEE FX weakness.

Inflation data and rate expectations in CEE

“Regional markets are firmly back in hawkish mode following the Fed chair’s comments and renewed escalation in the US-Iran conflict. With UK markets closed yesterday and CEE trading subdued, some catch-up is likely today.”

“Polish inflation surprised to the upside in August, rising from 3.0% to 3.4%, mainly due to higher fuel prices, as the statistics office likely did not account for the government’s VAT reduction in the latter part of the month. By contrast, food prices fell further, offering a dovish signal for inflation elsewhere in the region.”

“On Thursday, the Czech Republic will release second-quarter wage data, where we expect growth to slow from the unexpectedly strong 8.1% recorded in the first quarter. Turkey’s August inflation is also due; we forecast only a modest decline from 1.8% to 1.6% month on month.”

“On Friday, Czech inflation should rise from 1.7% to 1.9%, in line with the central bank’s forecast, while the Czech Republic and Hungary will publish retail sales data.”

“The Czech market is still pricing in almost four rate hikes and the Polish market nearly three, which should limit further weakening and could support gains today given further widening of rate differentials versus euro.”