Upcoming US midterm elections are a tight race. A divided government is a plausible outcome and would probably add volatility on markets in already turbulent times. Else: The economic downturn takes its course while inflation remains stubbornly high. Hard times for central banks!
Among emerging market currencies CEE FX markets are particularly exposed to the current volatility shock. The proximity to the war in Ukraine, unfavourable terms of trade effects from the energy crisis, Europe's dire economic outlook and the pressure on local central banks to do even more in light of hawkish global central banks is a complex terrain to navigate. To complicate things even more the unresolved topic of EU fund flows to Hungary and Poland adds to volatility and this topic might gain rather than lose attention over the coming weeks. In geopolitics, the rocket attacks on Ukrainian infrastructure is the latest step in a continued escalation of the war. The Ukrainian hryvnia proved surprisingly resilient to these attacks, while the Russian rouble has depreciated on the back of a declining trade surplus. On global markets, EUR/USD is in a volatile wait-and-see mode as ECB and Fed meetings are scheduled for the next two weeks, the British pound has regained some of its losses due to the fiscal policy U-turn and the People’s Bank of China struggles to stabilize the yuan facing an uncomfortable policy trade-off.
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