Croatia\u2019s industrial producer prices rose 5.7% year on year, while a cluster of data releases is due: Croatia\u2019s June retail sales at 11:00 CET, Romania\u2019s June unemployment at 08:00 CET, Hungary\u2019s June trade balance and preliminary Q2 GDP at 08:30 CET, and Czechia\u2019s preliminary Q2 GDP at 09:00 CET. In CEE energy, deviations of diesel and Euro95 from their respective year-to-date averages point to Czechia, Romania and Poland as most exposed to the shock linked to the Middle East conflict and disruptions around the Strait of Hormuz. After a memorandum of understanding eased tensions, fuel prices fell to the lowest levels versus YTD averages across the region, before July\u2019s renewed strains lifted both fuels back above those averages, complicating the disinflation path and hardening policy expectations, particularly in Czechia and Poland. <\/p>\n
In the US, the Federal Reserve left its policy rate unchanged at 3.50\u20133.75%, but the vote split drew attention, with three policymakers backing a 25-basis-point rise. The Fed characterised activity as solid and the labour market as stable, while reiterating that inflation remains above its 2% target and linking part of the pressure to energy-related supply shocks tied to Middle East tensions. Separate corporate statements on transparency and information updates were included.<\/p>\n
We are seeing renewed Middle East tensions push diesel and Euro95 fuel prices back above their year-to-date averages, disrupting disinflation across Central and Eastern Europe (CEE). This sudden energy shock is heavily impacting Poland, Czechia, and Romania, reversing the brief relief seen earlier this year. With global Brent crude prices currently trading volatilely near $83 per barrel, we believe derivative traders must prepare for prolonged regional price pressures.<\/p>\n
In response to these fuel pressures, central banks in Prague and Warsaw are likely to adopt a more hawkish stance in the coming weeks. We recommend that interest rate traders position for higher-for-longer rates by entering payer swaps in Polish Zloty (PLN) and Czech Koruna (CZK). Historical trends from the energy shocks of recent years show that CEE bond yields respond rapidly when local fuel-driven inflation begins to tick upward again.<\/p>\n
We also advise currency derivative traders to buy volatility on CEE pairs, particularly EUR\/PLN and EUR\/CZK. The Federal Reserve’s decision to hold its policy rate at 3.50\u20133.75% carried a strong hawkish signal, with three policymakers voting for a rate hike. This combination of a hawkish Fed and regional inflation risks will likely trigger sharp currency movements in the near term.<\/p>\n
Finally, we must pay close attention to today\u2019s preliminary Q2 GDP releases from Czechia and Hungary, as well as Croatia’s 5.7% industrial producer price jump. These growth figures will reveal if these economies are strong enough to handle tighter monetary policies. For example, if Czech Q2 GDP beats the previous quarter’s modest growth of 0.2% to 0.4%, it will give policymakers more confidence to keep interest rates elevated.<\/p>\n\n\n\n