ING strategist Frantisek Taborsky notes Central and Eastern European (CEE) rates are reconnecting with higher energy prices after a period of weaker correlation. Despite stronger regional Gross Domestic Product (GDP) than the Eurozone, he argues inflation remains the key issue. With upcoming data from Poland, the Czech Republic and Hungary, he sees CEE currencies facing greater downside than upside in the near term.

CEE rates track rising energy prices

“In the CEE region, FX markets saw some stabilisation yesterday following Friday’s sell-off, though negative global conditions remain largely unchanged.”

“The region opened this week with rates catching up to rising energy prices. The correlation between rates and energy prices has weakened in recent weeks; based on patterns from previous months, CEE rates should be higher.”

“Still, the CEE region cannot escape the bond market turmoil seen in the eurozone, particularly in France, or growing concerns regarding a regional recession. Nevertheless, GDP growth in the region has been somewhat stronger than in the eurozone, and we continue to view inflation as a more pressing issue locally.”

“Consequently, we believe rates are more likely to follow energy prices upward than to decline due to recession fears. The regional calendar is essentially empty until Friday, when inflation data for Poland and GDP figures for the Czech Republic and Hungary are due to be released.”

“In the coming days, the direction will naturally be influenced by the Fed and ECB meetings, as well as any new developments regarding the US-Iran conflict. That said, we believe CEE currencies face greater downside risk than upside potential.”