CEE Inflation Update: Czech Republic Faces Downside Inflation Surprises Amid Stable FX Market

CEE: Another dovish message for CNB

Today's calendar includes the publication of July inflation in the Czech Republic. We expect a further fall from 9.7% to 8.7% YoY in the headline number. The market expects 8.8% and the CNB's new forecast paints 8.9% YoY. Previously released inflation in Poland and Hungary confirmed food prices dropped by 1.2% and 1.4% MoM in July, implying a drop in the Czech Republic as well. At the same time, core inflation, in particular, has surprised to the downside in recent months. Overall, we think the bar for hawkish surprises is high and see the potential for further downside surprises in the Czech Republic today.

In the FX market, EUR/CZK has been surprisingly stable since last week's CNB meeting, when the Board ended the intervention regime. One may wonder if the CNB is not active in the market again. The available central bank balance sheet data only shows us last week. However, these numbers imply zero CNB activity as expected. Thus, we think today's inflation numbers may open the way for the market to test higher EUR/CZK above 24.30 and confirm that the central bank is fine with a weaker koruna.

Elsewhere in the region, we are curious to see what impact yesterday's jump in gas prices up nearly 40% will have. For now, the CEE FX reaction has been muted, but in any case, this is not good news for the region. US inflation will also come into play today, while EUR/USD has been the main driver for HUF and PLN in recent days. Overall, we are on the bearish side for CEE FX today.