CEE FX: Geopolitics drives rates and currencies – ING

ING strategist Frantisek Taborsky points to easing inflation in Romania, primarily due to base effects, with the National Bank of Romania unlikely to reduce rates before early 2027. Geopolitical tensions, particularly between the US and Iran, have resulted in hawkish pricing across Central and Eastern Europe (CEE) after a significant rate reduction due to these tensions.

Nevertheless, higher yields could provide foreign exchange (FX) protection, aiding the recovery of the Czech Koruna (CZK) and Zloty, while the Hungarian Forint (HUF) faces ongoing pressure from energy concerns. In Romania, the July inflation data released showed a decrease in headline inflation from 10.4% to 8.2% year-over-year, marking the lowest level since mid-2025.

However, this reduction is mainly attributed to base effects, with no significant slowdown in month-on-month momentum. The National Bank of Romania is expected to maintain relatively high rates, unlikely to cut them before early 2027. Other than Romania, the rest of the CEE region witnesses a calm calendar, with core markets and geopolitical factors taking center stage.

Sharp rate sell-offs at the start of the trading session, led by the Czech Republic, have given way to some relief from the US-Iran talks, but pricing remains hawkish, with expectations of almost three rate hikes for the Czech Republic and two for Poland. The Czech koruna and Zloty are anticipated to recover, while the Forint is likely to stay under pressure due to local energy supply concerns.

The market might have overestimated the need for tightening rates, and higher yields could offer some FX protection, potentially leading to more stable currencies, as observed at the beginning of the conflict.