GBP: Room to soften vs EUR
Incidentally, expect a steady flow of information about the content of the November budget in the coming weeks. That appears like a double-edged sword for sterling. Any concerns about fiscal sustainability will hit back-end gilts and spill over into the pound, while higher taxation should dampen growth and raise chances of earlier BoE easing.
We retain a bullish bias on EUR/GBP, and see risks skewed to 0.88 into the budget event risk.
CEE: Local and global story provides more room for rally
This week, central bank meetings and geopolitics are in focus. Today, wage data, industrial production, and PPI will be published in Poland. While calendar effects and a low comparison base provide a good foundation for industrial production, foreign developments point in the opposite direction.
On Tuesday, the National Bank of Hungary is expected to keep its rates unchanged at 6.50%. More interesting will be the forward guidance, given the weak economy and renewed calls from the government for lower rates. However, hawkish pushback from the central bank can be expected, as headlines in recent days have indicated. On Wednesday, we should see strong retail sales in Poland continuing their recovery.
On Thursday, the Central Bank of Turkey will continue its cutting cycle, where we expect a slowdown to 150bp after inflation surprised to the upside in September. Therefore, the risk is also for a smaller or no rate cut.
Outside the calendar, we will also be watching a possible meeting between the American and Russian presidents in Budapest, announced last week, which could bring some progress in the Ukraine-Russia conflict and have an impact on the CEE region. Here we see HUF and PLN as the biggest potential beneficiaries in a possible market reaction, with the market already confirming this bias on Friday. On top of that, we are approaching the blackout period of the Czech National Bank, and this week we might see the first interviews.
As we discussed here on Friday, CEE FX has a good constellation of conditions for further rally with a potential boost from a Ukraine-Russia ceasefire. At the same time, EUR/USD has bounced upward, and local rates have stabilised after a rapid rally. We are therefore bullish on the CEE region this week, where hawkish stances from NBH and CNB could add to the momentum. In detail, however, EUR/PLN has reached the bottom of its usual range, and the room here is limited. On the other hand, EUR/HUF could return to 388 and EUR/CZK to 24.250.
