FX markets have moved closer to a commonly shared scenario and in the absence of additional volatility shocks, exchange rates have stabilized after a dynamic first quarter. On global markets, this scenario mirrors central banks which are closing in on their terminal rate levels, rate cuts though not imminent, core inflation stabilizing, and economic momentum speaking for a soft rather than hard landing. For EUR/USD this implies sideways at 1.10. In CEE the appreciation of CE-3 came to a halt with the Polish złoty catching up to its peers at the very last minute. The Czech koruna had to shed some feathers after sentiment grew overly optimistic. With CNB and Fed meetings today and ECB tomorrow, FX markets are on the lookout for impulses which can challenge the current status quo.
This issues features:
The low 2022 comparison base and administrative price controls led to an impressive inflation slowdown to 6% yoy in March vs. 11.7% yoy in February 2023. In terms of price segments, the highest price growth occurred in food, while the non-food costs slowed down significantly
Disinflation begins to unfold in Europe, CE/SEE countries included, primarily driven by base effects. Meanwhile, especially core and food price pressures remain high and broad. These two categories are key inflation drivers vs. a decline in contribution in the case of energy (amplified by ongoing government interventions).
Markets have stabilized after risks of spillovers to the broader banking sector faded. The focus is shifting back to the usual suspects but an aftertaste of more dovish central banks stuck. In contrast to rate markets, FX market volatility has receded to previous levels. The euro has emerged stronger and also currencies of Central Europe regained their highs. Not so for the Polish zloty which was not impressed by global volatility already in the first place. Interestingly, the Russian rouble depreciated in recent days, despite global energy prices surging after OPEC+ announced deeper production cuts.
This issues features:
With energy prices receding and no shortages of inputs, the risk of a severe downturn has reduced. Still, growth will likely be modest in 2023. Financial market stress added to the headwinds. Inflation will remain high despite disinflation, but government interventions affect it.