Weaker US labour data and a softer dollar helped CEE FX recover last week, shifting attention back to domestic factors. June inflation data for Hungary and the Czech Republic are due tomorrow, and following a downside surprise in Polish inflation last week alongside a sharp drop in fuel prices, markets are leaning towards softer readings this time as well.
Hungary’s headline inflation is expected to tick up to 1.9% from 1.8%, which would be below the National Bank of Hungary’s 2.0% forecast. Czech inflation is seen easing to 1.9% from 2.1%, under the Czech National Bank’s 2.1% projection, and both outcomes would point towards a more dovish policy backdrop. The National Bank of Poland is expected to keep rates at 3.75% on Wednesday and release updated projections; inflation is likely to be revised higher than in March due to the inclusion of the US-Iran conflict, though recent downside surprises may shape a dovish message. While risk sentiment towards CEE FX has improved, softer inflation prints and dovish signals could weigh on local currencies, with the stated medium-term bias remaining bullish for CZK and HUF and bearish for PLN.
Impact of Softer U.S. Data and Upcoming Inflation Releases
Weaker U.S. labor data from last week is giving Central and Eastern European currencies some room to breathe. The recent Non-Farm Payrolls report showed a gain of only 150,000 jobs, below the consensus of 210,000, which has helped soften the dollar. The U.S. Dollar Index (DXY) has pulled back below the 104.5 level, providing a favorable backdrop for riskier assets.
Our focus now shifts to local inflation data due on July 7th for Hungary and the Czech Republic. Given the recent downside surprise in Polish inflation and a sharp fall in Brent crude prices to around $80 per barrel, we are positioned for soft prints. We see value in considering short-dated put options on the EUR/HUF and EUR/CZK pairs to hedge against a dovish market reaction.
Central Bank Policy and Currency Strategies
The National Bank of Poland is also likely to send a dovish message when it holds rates steady at 3.75% on July 8th. This reinforces our bearish view on the zloty, especially relative to its neighbors. A strategy for the coming weeks could involve selling the zloty against the koruna using 3-month forward contracts to capitalize on this divergence.
While this positive sentiment may carry over into the week, the expected low inflation numbers and dovish central bank tone could create short-term headwinds for local FX. We believe any resulting dips in the Czech koruna and Hungarian forint should be viewed as buying opportunities. This sets up attractive entry points for our medium-term bullish outlook on both currencies.
In the medium term, our bias remains for a stronger CZK and HUF, but a weaker PLN. Historically, the Czech National Bank has reacted more decisively to inflation, a trend we expect to continue and which supports a long CZK/PLN pairs trade. This strategy allows traders to isolate the fundamental differences between the two economies.
