Figure 1: CEE FX Performance Tracker [base: EUR] (20/09 – 27/09)

Source: Bloomberg Date: 30/09/2024

USD

Economic news out of the US continues to confirm that the Federal Reserve is succeeding in bringing about a soft landing, where inflation is brought down to target and a recession avoided. PCE inflation in September undershot expectations, and the core subindex is clearly now back at the Fed’s target of 2%. Meanwhile, data released is so far consistent with growth around 3% annualised, though admittedly it is very early in the quarter.

Figure 2: US PCE Inflation Rate (2019 – 2024)

Source: LSEG Datastream Date: 30/09/2024

While the November presidential election remains a coin toss and casts a pall of uncertainty, we think that the Fed is likely to revert to a cautious pace of rate cutting in 2025. This Friday’s payrolls report should once again be consistent with a labour market that is generating modest job growth, but remains near full employment. Another miss here, however, could cause markets to brace for the possibility of a second straight 50bp rate cut from the FOMC at its next meeting in early-November.

EUR

The steady drip of bad economic news out of the Eurozone shows no sign of letting up. Last week’s PMI readings, perhaps the most accurate leading indicator of economic activity in the area, fell to a level consistent with outright economic contraction. The manufacturing sector is in the midst of a deep recession, while the services sector is barely in expansion. This has raised fresh concerns over the health of the bloc’s economy, which looks likely to have stagnated in the third quarter of the year.

Combined with soft inflation readings out of Spain and France, the news seems to have sealed the deal for another interest rate cut at the next ECB meeting in October, and communications from Governing Council officials seem to confirm this. Flash inflation data on Tuesday is unlikely to change this, and we think the summer rally in the euro may have run its course.

GBP

The September PMIs of business activity came in a bit lower than expected, but are still consistent with steady economic expansion in both the services and manufacturing sectors, a stark contrast to the terrible readings across the Channel. MPC member Greene spoke last week, saying that she preferred a ‘steady as she goes’ approach to lower UK rates, which is consistent with the bank’s official rhetoric and in line with our call for cuts at no quicker than quarterly intervals for the time being.

Figure 3: UK PMIs (2022 – 2024)

Source: LSEG Datastream Date: 30/09/2024

The continued outperformance in the UK economy, combined with the Bank of England’s cautious approach to rate cuts, should help sterling continue to grind higher against the euro in the coming weeks. A big risk event, however, is next month’s budget, the first under the new Labour government. Higher tax rates are almost certainly on the way, but the breadth and extent of these hikes will determine whether we see any adverse reaction in currency markets.

RON

After a quiet week, it is time for the NBR meeting, which is likely to generate a lot of buzz. After two consecutive cuts, the next one is in doubt. The inflation outlook does not appear to be the most encouraging (headline measure at 5.1%, CORE2 resistant), particularly given the elevated wage growth, which has accelerated further as of late (14.8% in July) and has not yet translated into a pickup in demand to any significant extent. We are leaning towards a pause on Friday, it does not appear to be a foregone conclusion, however. In the face of considerable uncertainty, we will be interested not only in the change of rate itself (or lack thereof), but also in the announcements coming from the bank, which will help us to outline the further path of its monetary policy.

PLN

Last week, the Polish zloty reached its strongest level since mid-July (just above the 4.25 mark). While it outperformed all its regional peers, it was down slightly against the euro and the US dollar for the week. The initial rally was supported by the news of the Chinese stimulus, which boosted the EM spectrum. Recent signals from Europe were, however, dire and brought further concerns over the impact of the Eurozone’s underwhelming performance on Poland’s economy. Domestic news has also been largely disappointingof late.

Today’s inflation data showed an expected increase to 4.9% in September. While unwelcome, it is unlikely to prompt any shift in rhetoric (not mentioning action) from the NBP, which meets this week. No change in rates is expected either on Wednesday or at the next couple of meetings, with March being the earliest possible time for a cut considered realistic by both us and the economic consensus. Nevertheless, it would be interesting to see how the NBP reacts to the beginning of the easing cycle in the US and recent news from Poland and
the Eurozone.

HUF

Although the MNB meeting itself did not bring much volatility and global risk sentiment was rather benign, the forint suffered a noticeable weakening against the benchmark euro over the past week (-0.9%). Behind the 25bp cut, which brought the base rate to 6.5%, stood rather mixed communications. On the one hand, attention turned to looser monetary policy (amid Fed’s and ECB’s cuts in September), continued disinflation, improving risk perception and consumer confidence. On the other, however, the volatile financial market developments, renewed geopolitical tensions and risks to the inflation outlook were highlighted. The MNB is expected to be cautious and patient. That said, avoiding statements on the level of rates at the end of the year – unlike at the August meeting – indicates a slightly more dovish approach in our view.

Figure 4: MNB Interest Rate (2021 – 2024)

Source: Bloomberg Date: 30/09/2024

The coming week will bring trade balance (Tuesday), manufacturing PMI and industrial production data (both on Friday). These should not significantly affect the forint’s fate, however, which will probably depend primarily on Friday’s NFP report from the US.