inflation forecast

Hungarian inflation drops further than expected While we flirted with the idea of calling for negative monthly inflation in May, we've now seen a sharper drop than anybody expected. Non-core factors were the key drivers, and we now see the National Bank of Hungary sticking to its May playbook in easing.   A sharp drop in both headline and core inflation For Hungary, the potential of further easing in inflationary pressures in May has been on everyone's minds recently. We all saw last year’s speedy acceleration in inflation (especially in food products) and this time around, we knew that base effects would play a crucial role. The main question remained the month-on-month print.   The inflation print came in at –0.4% MoM in May, marking the first price drop since November 2020. With the help of base effects, headline inflation decelerated by 2.5ppt to 21.5% year-on-year. There is one exception in items where inflation hasn't eased, which also caused some downside surprises.     The details Food inflation came in at just 0.1% on a monthly basis, which reflects pricing changes in both unprocessed and processed food items. Here, the reading retreated to 33.5% YoY. This easing in price pressure is responsible for half of the deceleration in inflation from April to May. Both core and non-core items showed easing price changes, helping prompt the drop in core inflation. Motor fuel prices declined by 6.6% from April to May – slightly more sharply than our forecasts. A fixed price for almost the entire year in 2022 – thanks to the fuel price cap measure – also resulted in a significant reduction in the YoY inflation index. Household energy prices fell by 3% MoM, yet another downside surprise to our expectation of a weaker drop in prices. This easing price pressure is a result of an ongoing decrease in household energy consumption, combined with some seasonal factors as the heating season came to an end in May. This created a lower weighted average unit price of piped gas, the most important factor behind the drop. We'd also like to point out one exception where inflation wasn’t able to ease. For services, prices rose by 0.9% MoM on average in May, moving the yearly index up to 14.3% – though still a weaker acceleration than we expected. There is still a significant repricing of other services (financial and insurance services mostly), but holidays have also become more expensive, along with cultural and leisure services.     Underlying price pressures begin to calmThough the May deceleration of headline inflation was mostly driven by non-core factors, we saw some positive developments in underlying price pressures as well. This means falling inflation in durables, clothing, and processed food. As a result, core inflation came in at 0.5% MoM, the lowest repricing since autumn of 2021. Significant easing of monthly repricing is a result of collapsing domestic demand, with households facing the biggest drop in their purchasing power since the 2008-2009 crisis. Thus, the combination of the eased repricing and higher base ended up in a 2ppt lower YoY core inflation at 22.8%. Other underlying indicators – like declining sticky price inflation – are showing some promising signs that Hungary's economy could soon be out of the woods.       Further easing in price pressures ahead Moving forward, we expect both headline and core inflation to continue to retreat over the coming months – perhaps at a slightly slower pace without a significant downward impact on fuel. Domestic demand will remain constrained, especially given the shortfall in savings.   On the energy front, seasonality might help further reduce the average amount printed on overhead bills. The forint is getting stronger, which also helps to reduce imported inflation. The mandatory price cuts on some basic food items by large retailers could boost a reduction in food inflation – although we have some reservations about the overall impact, given the methodology of inflation calculation. Services might remain the only area where we can still expect some further acceleration in inflation.   Lower inflation forecast, no change in monetary policy view In light of today's surprise, a single-digit inflation rate at the end of the year seems almost certain. In fact, barring an energy and fuel price shock, a sub-10% rate could even be within reach by November. Considering the May inflation print, we have also revised our full-year inflation forecast for this year. We now expect the headline reading to be around 18% rather than 19% on average.   When it comes to the monetary policy implications of the May inflation reading, it will lend more confidence to the National Bank of Hungary to continue its gradual and cautious easing cycle. However, we maintain our view that the central bank will not change its playbook, and we expect to see a copy-and-paste version of the May rate decision on 20 June when decision makers gather for the June rate setting meeting.   This means that, in our view, the effective interest rate (the overnight quick deposit rate) could be cut by 100bp to 16%.

The worst might be behind Hungary. Yes, the economy is still in a technical recession, but we see a way out from it by the second half of 2023. A key source of the recovery lies in the growing disinflation process. The collapse of the domestic demand erases the repricing power of companies. Thus, we see a single-digit headline inflation by the year-end and further normalisation in 2024.   This means a positive real wage growth yet again from late-2023. However, with depleted household savings and tighter fiscal headroom, we hardly see a boom in domestic demand. The recovery will be export driven, thus we see a quick return to surplus in the current account balance. Improving external financing needs and the new era of monetary policy (eg, persistent positive real interest rates from late-2023) lead us to be constructive towards Hungarian assets.   Forecast summary   Macro digest The Hungarian economy has been stuck in a technical recession for three quarters (3Q22–1Q23) due to sky-high inflation suffocating economic activity. Consumption has been markedly slowing down since last autumn, as households cope with double-digit price increases, resulting in deteriorating purchasing power. On top of this, the high interest rate environment prompted a collapse in private investment activity, coupled with the government’s mandated freeze on public investments.   The only silver lining has been net exports, recently. Export activity is helped by pent-up production in car and battery manufacturing, while imports slow on lower energy demand.   Contribution to YoY GDP growth (ppt)   We expect the economy to emerge from the technical recession in the second quarter of this year, although the year-on-year growth will remain negative. As most economic sectors are still struggling amid weak domestic demand, the one sector that stands out on the positive side is agriculture.   The reason for this lies in base effects, which this time will help a lot, as last year’s energy crisis and drought wreaked havoc on the performance of agriculture.   Though this year’s weather has been favourable as well. In this regard, the fate of the overall 2023 GDP growth rather depends on the performance of agriculture as domestic demand will remain weak for the remainder of the year, curbing industry, construction and services.   Key activity indicators (swda; 2015 = 100%) In parallel with an acceleration of the disinflationary process, we expect the economy to display a rebound from the third quarter, delivering growth in every aspect for the remainder of the year. However, we expect a modest growth rate of 0.2% for 2023 followed by a 3.1% GDP expansion next year, boosted by both returning consumption growth and rising investment activity next to positive net exports.   Headline and underlying measures of inflation (%YoY)     Headline inflation retreated to 21.5% YoY in May, after peaking in January, while core inflation has also improved, with services being the only component where we see upside risks in the short run. As for the other components, food inflation has moderated for five months, while both motor fuel and household energy prices have recently declined, supported by a fall in global energy prices and a stronger HUF. We expect inflation to continue to retreat gradually in the coming months, as demand is vastly constrained by the loss of household purchasing power. In addition, base effects are contributing significantly to this year’s disinflationary process, which will accelerate from the third quarter onwards, thus we see the year-end reading dipping comfortably below 10%. At the same time, we expect inflation to average around 18% for this year, with balanced risks to our forecast. However, after two years of double-digit average inflation figures, we expect the full-year average to come in at around 5% in 2024

It was mostly a good day for the global markets, except for Europe, which saw the European Central Bank (ECB) expectedly raise interest rates by 25bp, but unexpectedly raised inflation forecast, as well.   European policymakers now expect core inflation to average past the 5% mark, while in March projection this forecast was only at around 4.6%. This could sound a bit counterintuitive, because we have been seeing slower inflation and slower activity across the Eurozone countries, with the latest growth numbers even pointing at a mild recession. Yet the strength of the jobs market, and the stickiness of services and housing prices keep ECB officials alert and prepared for a further rate hike in July... and maybe another one in September.       Euro rallies  At the wake of the ECB meeting, the implied probability of a July hike jumped from 50% to 80%, sending the EURUSD rallying. The pair rallied well past its 50-DMA and hit 1.0950, and is up by more than 3% since the beginning of this month. The medium-term outlook remains bullish for the EURUSD due to divergence between a decidedly hawkish ECB, and exhausting Federal Reserve (Fed). The next bullish target stands at 1.12.  The US dollar sank below its 50-DMA, impacted by softening retail sales, rising jobless claims, slowing industrial production and perhaps by a broadly stronger euro following the ECB's higher inflation forecasts, as well.   Elsewhere, rally in EURJPY gained momentum above the 150 mark, as the Bank of Japan (BoJ) decided to do nothing about its abnormally low interest rates today, which seem even more anomalous when you think that the rest of the major central banks are either hiking, or say they will hike. The dollar yen is back above the 140 mark, as traders see little reason to buy the yen when the BoJ outlook remains blurred. Note that some investors expected at least a wider YCC policy to 1% mark, but the BoJ didn't even bother to make a change on that front.       Japanese stocks overbought near 33-year highs  Good news is, Japanese stocks benefit from softer yen and ample BoJ policy, and consolidate gains near 33-year highs. The overbought market conditions, and the idea that Japan will, one day in our lifetime, normalize rates could lead to some profit taking, but it's also true that companies in geopolitically sensitive sectors like defense and semiconductors have been major drivers of the rally this year, and there is no reason for that appetite to change when the geopolitical landscape remains this tense. The former US Secretary of State just said he believes that a conflict between China and Taiwan is likely if tensions continue their current course.   By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank    

Bank of Japan keeps policy settings unchanged – for now The BoJ has unanimously decided to maintain its ultra-easing monetary policy as it is still looking for clearer signs of sustainable inflation growth. We believe higher-than-expected inflation, a continued solid economic recovery, and growing pressures from the weaker yen will eventually convince the bank to revise its YCC policy in July.   The Bank of Japan's no change decision was very much in line with market expectations The Bank of Japan's (BoJ’s) monetary policy statement hasn’t changed much at all on its view on the growth and inflation outlook and hasn’t given a hint of any exit plans. The BoJ kept its dovish stance by repeating that “the bank will not hesitate to take additional easing measures if necessary”. What is more worth noting, however, is that the BoJ pointed out that wage gains are expected, accompanied by changes in firms’ price and wage-setting behaviour. We believe that this is the change of structural and behavioural disinflation factor that the BoJ has been looking for.   To be precise, the latest labour cash earnings data were disappointing despite the surprisingly solid Shunto (Spring wage negotiations) results. Thus, an improvement in earnings is another factor to watch to gauge the BoJ’s policy action and we will also see how earnings data unfold in the coming months. We believe that rising asset prices are another important factor in sustainable inflation. With recent rallies in Japanese equity markets and the gradual rise in housing prices, the positive wealth effect is likely to keep inflation above the BoJ’s target, in our view.   Dovish comments from Governor Ueda Governor Kazuo Ueda’s comments at the press conference were no different from what the statement suggested. Ueda is concerned that the outlook for wage growth is highly uncertain and wants to see clearer signs of sustainable inflation. There were no hints about future policy adjustments in his comments.   However, we still think that the BoJ can change its YCC policy in July for the following reasons: First, the BoJ is likely to upgrade its inflation forecast in the quarterly outlook report in July. That could more easily justify the BoJ’s policy action. As mentioned previously, we expect inflation to remain higher for longer than expected.   Second, the overall bond market functions have improved, although there have been some fluctuations since December’s YCC band widening, and the market is not testing BoJ’s YCC upper limit of 10Y JGB. Thus, we believe that the market stress has been reduced, and it is a good time for the BoJ to revisit its YCC policy to reflect changes in market conditions.   Third, a weaker yen will likely add more inflationary pressures. If the BoJ continues to maintain its current policy setting, it would risk leaving the BoJ “behind the curve”. We believe that Japan’s economy is recovering solidly compared to other major economies and will continue to outperform in the future. But, if monetary policy fails to reflect this shift of economic fundamentals and the BoJ keeps its dovish policy, then the yen should depreciate even more.Lastly, by the time of the July meeting, the US Federal Reserve will have already decided on monetary policy, and where the UST will be is another factor the BoJ should consider.   From now on, we will be closely watching upcoming data releases such as June Tokyo CPI, labour cash earnings, and the movement in JPY, to see if these give a clearer signal of sustainable inflation.

 BSP extends prudent pause Bangko Sentral ng Pilipinas held rates at 6.25% today, a move widely expected by market participants. Governor Felipe Medalla had previously been talking up the likelihood of a pause at today’s meeting, citing moderating inflation as the main consideration. BSP's inflation forecast was adjusted lower for 2023 (5.4% year-on-year from 5.5% previously) but the 2024 inflation forecast was raised to 2.9%YoY from 2.8%. Meanwhile, BSP expects 2025 inflation to settle within target at 3.2%YoY. Today’s decision extends the BSP’s “prudent pause” to two meetings and we could see BSP on hold for a couple of more meetings if inflation continues to moderate and head closer to target. BSP expects inflation to settle within its target band as early as September, although the central bank did indicate that risks to the inflation outlook remain tilted to the upside. A looming bout with El Niño (the unusual warming of the eastern Pacific Ocean which subsequently drives surface air temperatures and pressure changes throughout the equator) could force food prices higher, and thus BSP has left the door open for further tightening if warranted.   Philippine real policy rates now in positive territory   Last dance for Medalla? Today’s policy decision could be the last policy move for Medalla, whose term ends by the close of the month. President Ferdinand Marcos has yet to decide whether to reappoint Medalla to a second term or choose another candidate.  Marcos’ choice for governor will likely inform our outlook for BSP’s policy stance, but should Medalla be reappointed, we expect BSP to be on hold for at least two more policy meetings before possibly cutting rates once inflation settles back within target. 

South Africa A very quiet week with PPI the only notable release. Inflation is falling back towards target and the PPI may offer insight into whether those pressures are continuing to head in the right direction.   Turkey Thursday’s 6.5% rate hike suggests Turkey is on the path back to a conventional monetary policy approach. Markets were pricing in a lot more but with President Erdogan openly against hiking rates – despite replacing the Governor who was happy to cut on his behalf – the CBRT may be treading a little carefully. As we’ve seen before, Erdogan will not hesitate to sack a Governor so perhaps his new appointment simply has ambitions to still be employed in September. No major economic releases next week.   Switzerland There are a few data releases next week, but SNB Chair Thomas Jordan’s appearance will probably be the highlight. The SNB hiked rates by 25 basis point this past week and markets believe there’s another in the pipeline. Jordan previously hinted at the neutral rate being 2% and the SNB indicated on Thursday that another hike may follow. With inflation forecast to stay above 2% for the next couple of years, only a drop in it over the next couple of months may change the SNBs mind.   China Not much action on the economic data front with the only key data on manufacturing and services activities to digest. On Friday, we will have the release of the NBS Manufacturing and Non-Manufacturing PMIs for June. Manufacturing PMI is forecasted to rebound slightly to 49.0 after it contracted to a five-month low of 48.8 in May. In contrast, the growth trajectory of Non-Manufacturing PMI is forecasted to dip to 53.7 in June from 54.5 in May. If it turns out as expected, it will be the third consecutive month of a growth slowdown in services activities. These data will be closely watched to determine and gauge the next move from China’s top policymakers as market participants wait eagerly for the amount and scope of an impending new fiscal stimulus measure that the State Council stopped short of giving out any details about it last week. India A couple of key data to take note of on Friday; bank loan growth, Q1 current account where its deficit is forecasted to narrow to -$16 billion from $-18.2 billion recorded in Q4 2022, and Q1 external debt that is forecasted to edge lower to US$602 billion from $613.1 billion recorded in Q4 2022.

Monitoring Poland: National Bank of Poland looks set to ease Surprisingly, neither the ruling PiS party nor the opposition unveiled new social spending plans in June. We expect new announcements just before the elections, possibly in September. We expect a fast decline in CPI in 2H23, supporting – in our view – NBP policy easing in 2023. This offers a positive outlook for POLGBs, at least until the general elections.   We expect no policy changes from the National Bank of Poland (NBP) in July. The central bank will present new projections, likely reflecting a series of downside CPI surprises. However, we estimate that the chances of a rate cut after the August Monetary Policy Council break have increased to 65-70%. This follows the guidance provided by some MPC members, including President Adam Glapinski, and the recent lower-than-expected CPI print in June. We see more than one interest rate cut in 2023 as possible. Our short-term inflation forecast is optimistic, with CPI falling to single digits in August – something which should further strengthen the MPC’s dovish stance. Our long-term CPI forecasts are substantially less favourable though. Core inflation could stabilise around 5% year-on-year in 2024-25, given the tight labour market, another significant rise in the minimum wage and valorisation of the 500+ child benefits (to PLN800 per child per month).   Risks to our 2023 GDP of 1.2% growth forecast are mounting. Second-quarter growth most likely underperformed (with flat or negative year-on-year growth), given poor retail sales, industrial output and an only 45.1 point manufacturing PMI print in June. Consumer sentiment is improving but from a very low level. Moreover, real wages are set to only start to grow sometime in the third quarter, after around a year of negative growth. Also, the government’s recent cheap mortgage scheme has come too late to give a boost to housing construction this year. Given the likely lacklustre internal demand, net exports are set to be a key GDP driver this year.   FX and money markets The zloty continues to benefit from a mix of current account surplus, more FX sales on the market by the Ministry of Finance, inflows from Foreign Direct Investment and portfolio capital. Some investors seem to expect a more market-friendly political environment after the parliamentary elections. We expect all those factors to persist at least until the elections. We expect €/PLN to gradually sink towards, or slightly below, 4.40 in the coming weeks.   Domestic debt and rates Despite higher overall 2023 borrowing needs after the state budget amendment, the government aims to finance these via a reduction of the sizeable cash buffer (PLN117bn as of the end of May) and FX funding, hence limiting Polish government bonds (POLGBs) issuance compared to the initial budget bill. In tandem with the expectations for monetary policy easing (fueled by the recent CPI print), this suggests further drops in yields across the curve and some tightening in asset swaps.

Czech inflation back in single digits Inflation fell into single-digit territory for the first time since early 2022 and is the lowest in the CEE region. However, this will not be enough for the Czech National Bank to change its tone. Disinflation will slow next month. We do not expect the first cut until November.   Lowest inflation in the CEE region June consumer prices rose 0.34% month-on-month, which translated into a drop from 11.1% to 9.7% year-on-year. Inflation in the Czech Republic is the lowest since December 2021 and the country is now the first in the CEE region to have returned to single-digit territory. Prices were pushed up in June mainly by seasonal factors in recreation prices. Otherwise, we saw a steady rise across the consumer basket. Core inflation fell from 8.6% to 7.8% YoY with downside risk, according to our calculations. The CNB will release official numbers later today, as always. June inflation is four-tenths below the central bank's forecast, but this means a one-tenth reduction in the previous forecast deviation. Core inflation in the second quarter, by our calculations, surprised the central bank to the downside by two-tenths on average.   Contributions to year-on-year inflation (bp)     The CNB wants to see more before cutting rates Looking ahead, our fresh nowcast indicator points to July inflation falling to 8.6% YoY. The pace of disinflation should thus start to slow in line with our earlier expectations. Therefore, we think today's result will not be a game-changer and the current drop in inflation will not be enough for the CNB. Today's inflation number is the last before the central bank's August meeting, including a new forecast. We expect the CNB to wait to cut rates until the November meeting with the risk of postponement until the first quarter of next year.

USD/JPY has shed -5.4% from its 30 June 2023 high of 145.07, on sight to record its worst weekly loss since 7 November 2022. Today’s intraday sell-off has managed to hold at the 200-day moving average acting as support at 137.65. Short-term momentum has turned positive which increases the odds of a corrective rebound.   This is a follow-up on our prior analysis “USD/JPY Technical: “At risk of a minor bounce before bearish tone resumes” published earlier this week on 11 July 2023. The USD/JPY has tumbled in an almost straight-line fashion on broke below the 138.70 short-term support as highlighted (click here for a recap). The USD/JPY has torpedoed downwards by -5.40% from its recent high of 145.07 printed on 30 June 2023 to today, 14 July Asian session intraday low of 137.24 at this time of the writing. It has challenged the key 200-day moving average and recorded its worse weekly loss since the week of 7 November 2022. Talks of an imminent ultra-dovish monetary policy shift from the Bank of Japan (BoJ) in the upcoming monetary policy decision meeting on 28 July have started to make their rounds again. In today, 13 July Asian session, there are two news flows that advocate a tilt away from negative interest rates in Japan. Firstly, local Japanese media, Yomiuri reported that BoJ is likely to raise its FY 2023 annual inflation forecast to above 2% for its latest quarterly outlook report which is released on the same day as the upcoming 28 July monetary policy decision outcome. Secondly, former BoJ official, Hideo Hayakawa commented that he is expecting another tweak to the yield curve control programme on 28 July with a more aggressive bias of 50 basis points (bps) widening on the band of around 0% on the 10-year Japanese Government Bonds (JGB) yield to 1% from the current level of 0.5%. Previously, BoJ caught markets by surprise by widening the 10-year JGB yield band by 25 bps on 20 December 2022.   Holding at key 200-day moving average   Fig 1:  US/JPY medium-term trend as of 14 Jul 2023 (Source: TradingView, click to enlarge chart) The current decline in place since 30 June 2023 has reached its 200-day moving average which confluences with a graphical support of 137.65 (former swing high areas of 15 December 2022, 8 March 2023, and 2 May 2023). In addition, today’s price action at this time of the writing has formed an impending bullish daily “Hammer” candlestick pattern which indicates that odds have risen for a potential minor rebound in price actions to retrace the prior five days of steep descent.   Positive short-term momentum has emerged   Fig 2:  US/JPY minor short-term trend as of 14 Jul 2023 (Source: TradingView, click to enlarge chart) The hourly RSI oscillator has flashed out another bullish divergence signal at its oversold region and just staged a bullish breakout above a key parallel descending resistance at the 43 level. These observations suggest the recent downside momentum has abated. Watch the 137.65/40 key medium-term pivotal support for a potential corrective rebound scenario with the next intermediate resistances coming in at 139.00 and 139.70/140.10 (also the 38.2% Fibonacci retracement of the current decline from the 30 June 2023 high to today’s 14 July intraday low of 137.24). On the flip side, a break below 137.40 invalidates the corrective rebound to expose the next support at 135.70/50 (the 61.8% Fibonacci retracement of the prior up move from 24 March 2023 low to 30 June 2023 high).    

USD/JPY has shed -5.4% from its 30 June 2023 high of 145.07, on sight to record its worst weekly loss since 7 November 2022. Today’s intraday sell-off has managed to hold at the 200-day moving average acting as support at 137.65. Short-term momentum has turned positive which increases the odds of a corrective rebound. This is a follow-up on our prior analysis “USD/JPY Technical: “At risk of a minor bounce before bearish tone resumes” published earlier this week on 11 July 2023. The USD/JPY has tumbled in an almost straight-line fashion on broke below the 138.70 short-term support as highlighted (click here for a recap). The USD/JPY has torpedoed downwards by -5.40% from its recent high of 145.07 printed on 30 June 2023 to today, 14 July Asian session intraday low of 137.24 at this time of the writing. It has challenged the key 200-day moving average and recorded its worse weekly loss since the week of 7 November 2022. Talks of an imminent ultra-dovish monetary policy shift from the Bank of Japan (BoJ) in the upcoming monetary policy decision meeting on 28 July have started to make their rounds again. In today, 13 July Asian session, there are two news flows that advocate a tilt away from negative interest rates in Japan. Firstly, local Japanese media, Yomiuri reported that BoJ is likely to raise its FY 2023 annual inflation forecast to above 2% for its latest quarterly outlook report which is released on the same day as the upcoming 28 July monetary policy decision outcome. Secondly, former BoJ official, Hideo Hayakawa commented that he is expecting another tweak to the yield curve control programme on 28 July with a more aggressive bias of 50 basis points (bps) widening on the band of around 0% on the 10-year Japanese Government Bonds (JGB) yield to 1% from the current level of 0.5%. Previously, BoJ caught markets by surprise by widening the 10-year JGB yield band by 25 bps on 20 December 2022. Holding at key 200-day moving average   Fig 1:  US/JPY medium-term trend as of 14 Jul 2023 (Source: TradingView, click to enlarge chart) The current decline in place since 30 June 2023 has reached its 200-day moving average which confluences with a graphical support of 137.65 (former swing high areas of 15 December 2022, 8 March 2023, and 2 May 2023). In addition, today’s price action at this time of the writing has formed an impending bullish daily “Hammer” candlestick pattern which indicates that odds have risen for a potential minor rebound in price actions to retrace the prior five days of steep descent.   Positive short-term momentum has emerged     Fig 2:  US/JPY minor short-term trend as of 14 Jul 2023 (Source: TradingView, click to enlarge chart) The hourly RSI oscillator has flashed out another bullish divergence signal at its oversold region and just staged a bullish breakout above a key parallel descending resistance at the 43 level. These observations suggest the recent downside momentum has abated. Watch the 137.65/40 key medium-term pivotal support for a potential corrective rebound scenario with the next intermediate resistances coming in at 139.00 and 139.70/140.10 (also the 38.2% Fibonacci retracement of the current decline from the 30 June 2023 high to today’s 14 July intraday low of 137.24). On the flip side, a break below 137.40 invalidates the corrective rebound to expose the next support at 135.70/50 (the 61.8% Fibonacci retracement of the prior up move from 24 March 2023 low to 30 June 2023 high).  

Yen moves higher as Bank of Japan tweaks YCC By Michael Hewson (Chief Market Analyst at CMC Markets UK) European markets saw a strong session yesterday, buoyed by the belief that the central banks could be done when it comes to further rate hikes, after the ECB followed the Fed by raising rates by 25bps and then suggesting that a pause might be on the table when they next meet in September. The mood was also helped by a strong set of US economic numbers which pointed to a goldilocks scenario for the US economy.     US markets also opened strongly with the S&P500 pushing above the 4,600 level and its highest level since March 2022, before retreating and closing sharply lower, with the Dow closing lower, breaking a run of 13 days of gains. Sentiment abruptly changed during the US session on reports that the Bank of Japan might look at a possible "tweak" to its yield curve control policy at its latest policy meeting earlier this morning.     This report, coming only hours before today's scheduled meeting, caught markets on the hop somewhat pushing the Japanese yen higher against the US dollar, while pushing US 10-year yields back above 4%. With Japanese core inflation above 4% there was always the possibility that the Bank of Japan might spring a surprise, or at least lay the groundwork for a possible tweak. The Bank of Japan has form for when it comes to wrong footing the market, and so it has proved, as at today's meeting they announced that they would allow the upper limit on the 10-year yield to move from 0.5% to 1%. They would do this by offering to purchase JGBs at 1% every day through fixed rate operations, effectively raising the current cap by 50bps, and sending the yen sharply higher. The central bank also raised its 2023 inflation forecast to 2.5% from 1.8%, while nudging its 2024 forecast lower to 1.9%.     As far as today's price action is concerned, the late decline in the US looks set to translate into a weaker European open, even though confidence is growing that the Fed is more or less done when it comes to its rate hiking cycle. Nonetheless, investors will be looking for further evidence of this with the latest core PCE deflator, as well as personal spending and income data for June, later this afternoon to support the idea of weaker inflation. Anything other than a PCE Core Deflator slowdown to 4.2% from 4.6%, could keep the prospect of a 25bps September hike on the table for a few weeks more. Both personal spending and income data are expected to improve to 0.4% and 0.5% respectively.     We're also expecting a tidal wave of European GDP and inflation numbers, which are expected to confirm a weaker economic performance than was the case in Q1, starting with France Q2 GDP which is expected to slow to 0.1% from 0.2%. The Spanish economy is also expected to slow from 0.6% to 0.4% in Q2. On the inflation front we'll be getting an early look at the latest inflation numbers for June from France and Germany as well as PPI numbers for Italy. France flash CPI for June is expected to slow to 5.1% from 5.3%, while Germany CPI is expected to slow to 6.6% from 6.8%. With PPI inflation acting as a leading indicator for weaker inflation for all of this year the latest Italy PPI numbers will be scrutinised for further weakness in the wake of a decline of -3.1% in May on a month-on-month basis and a -6.8% decline on a year-on-year basis.       EUR/USD – failed to follow through above the 1.1120 area, subsequently slipping back, falling below the 1.1000 area, which could see a retest of the 1.0850 area which is the lows of the last 2 weeks. Below 1.0850 targets a move back to the June lows at 1.0660.   GBP/USD – slipped back from the 1.3000 area, falling back below the Monday lows with the risk we could retest the 50-day SMA and trend line support at the 1.2710. While above this key support the uptrend from the March lows remains intact.       EUR/GBP – struggling to rally, with resistance at the 0.8600 area, and support at the recent lows at 0.8500/10. Above the 0.8600 area targets the highs last week at 0.8700/10.   USD/JPY – while below the 142.00 area, the bias remains for a move lower, with the move below 139.70 targeting a potential move towards the 200-day SMA at 137.20.   FTSE100 is expected to open 24 points lower at 7,668   DAX is expected to open 38 points lower at 16,368   CAC40 is expected to open 20 points lower at 7,445

TRY: Further moves towards policy orthodoxy In a further move towards policy orthodoxy, yesterday the Central Bank of Turkey presented its latest inflation report which saw its 2023 inflation forecast double. Our chief economist in Turkey, Muhammet Mercan, wrote a detailed review of this report here. The new inflation forecasts take on board developments in Turkey this year and have generally been received positively by the markets. In addition, three new deputy governors were appointed to the CBT last night – a move we also suspect will be welcomed by the markets. Clearly, the very high inflation in Turkey will pose many challenges to Turkish asset markets amidst this transition to policy orthodoxy, but this week's developments look consistent with the recent narrowing of Turkey's sovereign risk premium, where the five-year sovereign Credit Default swap dipped from 700bp in May to 430bp this week.

The collapse in domestic demand strengthens disinflation Headline inflation eased to 20.1% YoY in June, mainly driven by the 0.4% MoM decline in food prices. Within this, the fall in processed food prices was the main driver, hence the sharp 2ppt deceleration in core inflation to 20.8% YoY. In our view, the rapid deterioration in firms' pricing power is evident, and will only accelerate going forward as competition among retail outlets for households' overall shrinking disposable income intensifies. Based on our high-frequency data collection, we expect disinflation to strengthen further going forward, driven mainly by food deflation. In this context, we expect average inflation to fall to single digits in the fourth quarter, while average inflation for the year as a whole is likely to be below, but close to 18%.    Inflation and policy rate   Rate cuts to continue in 100bp steps if market stability prevails At the July meeting, monetary policy normalisation continued as the National Bank of Hungary (NBH) lowered the effective interest rate by a further 100bp to 15%. The central bank emphasised cautiousness, graduality and predictability, so we expect same-sized cuts into the September merger of base and effective rates. After September, however, the NBH has several options to alter the interest rate complex. The central bank can either continue the easing cycle unabated in 100bp increments, setting the policy rate at 10% at the end of 2023. However, reducing the pace of cuts to 50bp seems to be another viable option, leaving the key rate at 11.5%. In our view, the NBH will cut both repo and deposit rates by 100bp in October, leaving room for market rates to adjust lower, but will only cut the base rate by 100bp in November and December. We, therefore, expect the policy rate to end the year at 11%.   Real rates (%)   VAT receipts hit hard by fall in domestic demand The Hungarian budget posted a deficit of HUF 132.7bn in June, bringing the year-to-date cash flow-based shortfall to 85% of the full-year target. The decline in domestic demand is weighing heavily on tax revenues. In this respect, VAT receipts in the first half of 2023 were only 2.2% higher than a year ago compared to the 24% average inflation during this period. Despite some ongoing adjustments (e.g. public investment cuts), we still see a slippage of 0.5-1% of GDP in this year's budget. A recent interview with the Finance Minister revealed that a revision could come as early as September, which in our view could lead to additional adjustments plus a minor increase in the 2023 EDP deficit target. From a cash-flow perspective, the fate of the EU funds remains a key issue, with the clock ticking (90 days) at the European Commission's table, as the government officially submitted the self-review on horizontal enabler (judiciary) reforms on 18 July.   Budget performance (year-to-date, HUFbn)   We still believe in a HUF turnaround Although we heard what we thought we would from the National Bank of Hungary – a cautious cut with a commitment to remain patient – market players were ignorant of the hawkish message. The NBH’s assurance that the cutting cycle will not be accelerated did not result in a turnaround in EUR/HUF as we expected. However, our market view remains unchanged. In case of further forint weakening, we expect the central bank to hit the wire and repeat some hawkish statements, trying to push against HUF underperformance versus Central and Eastern European peers. Moreover, we see some improvement in conditions at the global level, too. Last but not least, despite the whole EU fund issue being overly politicised, we still believe in a positive outcome before the year-end. Our ultimate argument would be that European politicians don’t want to bother with Hungarian issues when European Parliament elections are approaching (June 2024). On a local level, we think FX carry should continue to be the main positive driver for the HUF, supported by an improving current account, a record decline in gas prices, and despite cuts by a cautious central bank, overall pushing EUR/HUF closer to 370.   CEE FX performance vs EUR (30 December 2022 = 100%)   We continue to see further curve steepening In the rates space, we found the IRS curve a bit steeper again after the last NBH meeting and a steeper and lower curve remains our main view for the coming months. 2s10s spread has moved roughly 100bp since May, the first rate cut, and we still see room for further normalisation of the IRS curve, which remains by far the most inverted in the CEE universe. Market expectations for this year are more or less fair given that the September rate merge is a broad market consensus, however, NBH's next steps are unclear to the market, and we see the market underestimating further normalisation in the next year or two, opening the door for more curve steepening. On the other hand, the fall in core rates will slow the normalisation of the curve compared to previous months.   Hungarian sovereign yield curve   Hungarian government bonds (HGBs) eased in July and the rest of the region caught up with the swift rally. We therefore see current valuations of HGBs as more justifiable, which could attract new buyers. Despite the fiscal slippage risk, year-to-date issuance has reached 60% by our calculations, which we see as more than sufficient. Moreover, recent government measures supporting HGBs and the fastest disinflation in the region should be enough to sustain demand.

Romanian National Bank preview: on autopilot for a while The Romanian National Bank (NBR) will announce its latest policy rate decision on 7 August. We expect the key rate to be maintained at 7.00% with no forward guidance. A new Inflation Report will be approved and presented a few days later which should largely confirm the central bank's previous inflation forecasts. With the inflation dynamic largely matching the NBR’s expectations, the central bank’s focus might shift a tad from inflation to growth, with the latter starting to give more and more credible signs of slowing down rather abruptly. Having said that, there is actually not much that the NBR can do here on top of what has been done already, which was to allow a hefty liquidity surplus in the money market and make the deposit facility the de-facto policy rate. Given that there are still no depreciation pressures for the Romanian leu, it is likely the current policy stance will be extended well into the year-end.   Persistent liquidity surplus   A new Inflation Report should reconfirm the previous forecasts Maybe more interesting than the monetary policy decision itself will be the presentation of the May Inflation Report which should take place a few days later and incorporate the NBR’s latest inflation projections. It is most likely to be the second report in a row which doesn’t differ much from the previous forecasts. The NBR currently sees CPI inflation at 7.1% in December 2023 and 4.2% in December 2024, not far from our estimates of 6.9% and 4.1% respectively. We might see the official forecasts getting into the 1.5-3.5% target range at the end of the two-year forecast horizon, while in our scenario it looks most likely to hover around 4.0%. Moreover, core inflation could prove stickier and remain above the headline figure for most of this timeframe.   Stickier core inflation   We believe that the NBR will stay on course on 7 August and for the rest of the year, despite the more frequent dovish statements coming from other central banks in the region. We maintain our view of a first rate cut in the first quarter of 2024 with a key rate of 5.5% by the end of 2024. The easing cycle will be justified by the lower inflation but likely tempered by core and regional yields, as the interest rate differential cannot narrow excessively. On the domestic front, the new fiscal measures announced in order to contain the budget gap are unlikely to meaningfully change the situation on the issuance front, where the Ministry of Finance is in a comfortable position (more on this here).   What to expect in FX and markets The liquidity surplus fell only marginally in June, remaining at a near-record RON25.2bn, indicating scant central bank activity. EUR/RON briefly broke through 4.920 last week, again likely due to high demand for Romanian government bonds (ROMGBs) and has been higher since but still well below any line in the sand set by the central bank. FX implied yields have also risen a bit in the last two months but still remain firmly anchored. We expect the NBR to take the opportunity to withdraw some liquidity from the market if EUR/RON moves higher. In the long term, we expect the NBR to move the bar up for EUR/RON at least once more and we should see the 5.02 level by the end of the year. ROMGBs eased the pressure a bit in July and we see current valuations as more justified. The spread against Polish government bonds has returned above 100bps in the 10y tenor and even against other CEE peers, the levels seem more fair. The funding story remains unchanged. According to our calculations, the MinFin has secured about 82.5% of this year's planned issuance, the highest figure in the CEE region. We also saw strong activity in retail issuance in July, making the overall funding situation the best in the region. On the other hand, we see potential incoming problems on the fiscal side. The government is discussing further measures to improve the state budget and we should hear more in the coming days. Despite the fiscal issues, we should see a reduction in the supply of ROMGBs. However, we expect MinFin to want to stay on the safe side given the uncertainty and if market demand continues the MinFin will be open to issue more than indicated.

Bank of England hikes by 25bps, keeps options open for September By Michael Hewson (Chief Market Analyst at CMC Markets UK)     As expected, the Bank of England raised rates by 25bps to a new 15-year high of 5.25%. This was the baseline assumption given an expectation that we could see further sharp falls in the CPI headline rate in just under 2 weeks' time when we get July CPI numbers, and the lower energy price cap kicks in. There was a 3-way split on the voting with Catherine Mann and Jonathan Haskell voting for a 50bps move, while external MPC member Swati Dhingra maintained her no change stance. The bank also downgraded its expectation for GDP growth for this year to 0.5% from 0.75%. They also downgraded their end of year inflation forecast to below 5%. The pound had already been trading lower in the leadup to the decision and has remained weak as markets price in the prospect that the terminal rate could be lower. This has softened below 5.7%. New MPC member Megan Greene, who replaced dove Silvana Tenreyro adopted a more hawkish position, going with the majority of a 25bps move.     It was also noteworthy that the bank said that rates would need to stay sufficiently restrictive for longer to be able to return inflation to its 2% target, which reading between the lines suggests that rates could be close to their peak. Deputy Governor Ben Broadbent more or less admitted this with his comments that UK policy was restrictive already, and that UK rates are now likely above the neutral rate. Time will tell, but with another 2 CPI reports to come before the September meeting there is a chance that today's hike could well have been the final one of this cycle. UK gilt yields appear to be pricing that prospect already with 2-year yields below 4.9% and down 10bps on the day.     Today's decision by the central bank has prompted a modest rebound in housing and banking stocks off the lows of the day, as traders take the view that the Bank of England is close to calling a pause on further rate hikes. There are some important caveats to a possible pause, with the governor warning that services price inflation has been much more persistent, but with the long and variable lags that monetary policy operates in, the bank needs to be careful about pushing its luck when it comes to further rate hikes, given the fragile nature of the UK economy as well as the housing market. The central bank needs to look more carefully at PPI in terms of the likely direction of headline CPI where we have already seen negative readings in both output and input prices.  

RBA says decision to pause was close call Australia to release confidence data on Tuesday US employment report a mixed bag The Australian dollar is coming off another rough week, with losses of 1.17%. The currency has looked dreadful, losing close to 300 points since July 17th. In Monday’s European session, AUD/USD is trading at  0.6556, down 0.20%. RBA in ‘wait and see’ mode The week wrapped up with the Reserve Bank of Australia’s quarterly policy statement, which didn’t reveal anything dramatic. The RBA paused rates for a second straight time last week and the statement indicated that the central bank is in a ‘wait and see’ mode with its rate policy. The RBA’s view is that inflation risks remain “broadly balanced” as it strives to guide the economy to a soft landing after an aggressive tightening campaign. The statement noted that the RBA has been divided on its rate path, saying that at the July and August meetings, the board considered raising rates. In the end, those members in favour of a pause won the day at both meetings, a signal that inflation is falling down fast enough for most members. The statement maintained the RBA’s forecast that inflation will drop to 4.1% by the end of the year and to 2% by the end of 2025, with core inflation dropping to 2.9% by mid-2025. We’ll get a look at Australian confidence data on Tuesday, with the markets braced for soft readings. Westpac Consumer Confidence is expected to dip to 80.7 in August, down from 81.3 in July. The NAB Business Confidence index is projected to decline to -3 in July, following the zero reading in June.   US employment report a mixed bag The July employment report was a mix. Nonfarm payrolls were soft at 187,000, despite a banner ADP release which fuelled expectations of a breakout nonfarm payrolls release. Job growth is slowing, but the unemployment rate ticked lower to 3.5% down from 3.6%, and wage growth stayed steady at 4.4%. The money markets are expecting the Federal Reserve to take a pause at the September meeting, with a probability of 84%, according to the FedWatch. It’s entirely possible that the Fed is done with tightening, but that will depend to a large extent on upcoming inflation and employment data. . AUD/USD Technical There is resistance at 0.6607 and 0.6700 0.6475 and 0.6382 are providing support  

Philippines central bank carries out another hawkish pause Bangko Sentral ng Pilipinas kept policy rates unchanged amid slowing growth momentum.   BSP extends pause The Bangko Sentral ng Pilipinas (BSP) kept policy rates untouched at 6.25% today. Governor Eli Remolona was likely mindful of the slowing growth momentum after second-quarter GDP dropped to a disappointing 4.3% year-on-year pace (the market consensus was 6%). BSP expects inflation to slow further in the coming months with headline inflation expected to settle within target by the fourth quarter.  Remolona however retained his hawkish stance, reiterating his readiness to hike policy rates if necessary while remaining data-dependent. The BSP pushed up its inflation forecast, likely due to the developments in global energy and food prices. BSP now sees inflation settling at 5.6% (from 5.4% in June) for 2023 and 3.3% (2.9%) for 2024.   BSP keeps rates steady for third consecutive meeting   Despite pause, BSP retains its hawkish bias This was the first policy meeting of the newly-minted Governor Remolona. He decided to extend BSP’s pause for a third consecutive meeting, looking to balance out the need to support fragile growth momentum while also keeping rates at restrictive levels to fend off budding price pressures.  Despite the pause, Remolona made sure to retain his hawkish bias, vowing to quickly resort to potential rate hikes in order to help anchor inflation expectations. BSP will likely be monitoring the upside risks to the inflation outlook such as potential wage hikes, rice price adjustments and the rising cost of imported energy for future policy moves. Furthermore, we expect Remolona to be monitoring the spot market, given its potential pass-through impact on inflation.  We expect BSP to retain policy rates at these levels for the remainder of the year as the central bank looks to balance the risks to growth and inflation. However, we could see BSP considering a rate hike down the line should the US Federal Reserve opt to increase policy rates before the end of the year, in order to maintain interest rate differentials    

Eurozone inflation stagnates ahead of ECB September meeting Inflation in the eurozone did not fall in August, which could tip the ECB in favour of a final 25bp hike at the governing council meeting in two weeks' time. Still, overall inflation dynamics remain relatively benign, and we still expect inflation to trend much lower at the end of the year. The eurozone inflation rate was stable at 5.3% in August, with core inflation also dropping to 5.3% (from 5.5% in July). Headline inflation was slightly higher than expectations due to energy price developments which increased by 3.2% month-on-month. This will fuel concern about inflation remaining more stubborn than anticipated. The overall trend in inflation remains cautiously disinflationary though as developments in goods and services inflation were more or less as expected. By country, we see that rising prices mainly came from France and Spain, while drops in the Netherlands and Italy kept inflation broadly in check. Energy effects and how they translate to consumer prices – look at rising regulated prices in France – were important drivers of differences this month. Looking ahead, more declines in inflation are in the making. In Germany, we expect a significant drop next month as base effects from government support drop from the data. Surveys also point to a sizable disinflationary effect for goods prices, while services inflation is set to fall more slowly thanks to higher wage costs. Indeed, wage growth is still trending above a level consistent with 2% inflation. For the European Central Bank, these August inflation data were among the most important data points ahead of the governing council meeting in two weeks’ time. While inflation remains stubborn enough to make ECB hawks uncomfortable, it does look like a further deceleration in inflation is in the making for the months ahead. Given the ECB mantra over recent months that doing too little is worse than doing too much in terms of hikes, we still expect another 25 basis point rate rise, despite this being a close call.

Romania: Fiscal adjustments needed to contain the widening deficit The second-quarter flash GDP print confirmed that the Romanian economy is slowing rather rapidly. GDP advanced by 1.1% in the second quarter and 1.7% in the first half of the year, visibly below our 2.3% estimate. While the detailed GDP data due on 7 September might shed a different light on the growth dynamic, we have already revised our 2023 GDP growth forecast from 2.5% to 1.5%, while maintaining 2024 at 3.7%. From a monetary policy perspective, the lower growth is likely to offset the marginal higher inflation forecast of the National Bank of Romania and lead to a stable interest rate environment for the rest of the year. We believe that the central bank is not yet contemplating the timing for a dovish pivot, despite the more frequent dovish statements coming from other central banks in the region. We maintain our view of a first rate cut in the first quarter of 2024 with a key rate of 5.5% by the end of 2024. Particularly relevant for future growth and the interest rates pattern is the final form of the fiscal package which is under discussion at the moment. We are likely to see a budget deficit target of around 5.0% of GDP (up from 4.4%) but how exactly it will be achieved is important. An emphasis on taxes such as VAT (e.g. a generalised VAT hike) will likely skew the inflation profile higher while it might have a lesser impact on growth, while a more aggressive stance on increasing income taxes (e.g. by eliminating some facilities for employees in IT, constructions, agriculture) could be more growth-detrimental in the short term, but more helpful on the inflation side.  

Investors were not impressed by the iPhone 15 and Apple Watch Series 9 reveal, causing Apple's shares to drop 1.8% and affecting the Nasdaq 100, which fell 1.1%. Adobe's stock also declined by 4% ahead of its upcoming earnings report. Meanwhile, OPEC's forecast of a tight oil market led to crude oil prices surging to 10-month highs. OPEC anticipates a significant 3.3mb/d supply deficit in Q4, one of the largest in over a decade. CAD outperformed in the G-10, while EUR made gains following an ECB leak about potential inflation forecast increases. Today's focus is on the US CPI report.     US Equities: Investors were not impressed by the iPhone 15 and Apple Watch Series 9 unveiled on Tuesday, seeing the shares of Apple drop by 1.8%. The Apple decline weighed on the Nasdaq 100 which slid 1.1%. Adding to the selling was a 4% decline in Adobe ahead of reporting on Thursday. Another focus in the tech space was Oracle, which plummeted 13.5% on weak cloud sales. The S&P500 shed 0.6%. Fixed income: The curve flattened as the 2-year yield rose 3bps to 5.02% while the 10-year yield slid 1bp to 4.28%. The short end was under some pressure ahead of today’s CPI data while the long ends held firm and absorbed the USD35 billion 10-year auction and around USD20 billion corporate bond issuance well. China/HK Equities: The Hang Seng Index ended a lackluster session with a thin trading volume session, down 0.4%. Energy and pharmaceutical names weighed on the benchmark. The Hang Seng Tech Index shed 0.5% as gains in Xiaomi and EV makers were offset by losses in Internet stocks. FX: Higher crude oil prices made CAD the G-10 outperformer with USDCAD down to 1.3550 from 1.3590 but EUR attempted to catch up in late NY/early Asian hours on ECB leak that inflation forecasts may be raised higher which are seen to be raising the prospect of a hike this week. EURUSD jumped higher to 1.0760 with EURGBP above the 0.86 hurdle as GBPUSD dipped below 1.25 on not-so-hawkish labor market. USDCNH sticking close to 7.30 and AUDUSD around 0.6425. Commodities: Crude oil prices rallied to fresh 10-month highs after OPEC forecast a significantly tight market. In its latest monthly outlook, the oil group said the market may experience a shortfall of 3.3mb/d in the fourth quarter of the year. This would make it one of the largest deficits in more than a decade. OPEC’s estimate was at odds with EIA’s predicted deficit of 230kb/d, and the IEA’s monthly report will be on watch today. Prices eased from the peaks as API reported a crude inventory build after four straight weekly draws although Cushing hub stockpiles declined, and official data will be reported today. Gold dropped below 200DMA as inflation concerns returned, bringing more fear of rate hikes and US CPI will be on watch today.    

The CFTC report published on Friday showed that long-term investors are bullish on the dollar. The weekly change was +3.6 billion, and the net short dollar position decreased to -6.9 billion. Among the major world currencies, only the yen has refrained from selling off, while all other currencies saw weekly changes in favor of the dollar. The US inflation data for August will be published on Wednesday. Rising oil prices may lead to a 0.5% m/m increase in overall inflation, which could fuel another Federal Reserve interest rate hike.   However, slowing wage growth could have a positive impact on consumer price growth in the services sector. At the moment, the markets are convinced that the Fed will take a break at the next meeting, the likelihood of a rate hike is only 7%, and the key meeting in this cycle will be in November, which is still far off. We believe that the US dollar is still the main favorite of the foreign exchange market, and investors will continue to buy because the market is convinced of the strength of the US economy. Although the greenback retreated from its previous highs on Monday, the other currencies look weaker. A possible rate hike by the European Central Bank is unlikely to strengthen the euro's position because weak economic data reduce the chances of decisive action by the ECB, and any sign of weakness on the part of the bank will be perceived by markets as another confirmation of the dollar's strength.   EUR/USD The ECB will hold its meeting on Thursday, where a final rate hike of 0.25% is expected. The markets still do not have a consensus on whether this hike will happen next Thursday or if the ECB willtake a pause until the next meeting. The high wage growth rates in the eurozone favor a rate hike. In the second quarter, wage growth was 5.6% y/y, even higher than the 5.4% in the previous quarter and exceeding the ECB's estimate of 5.3%, which was presented in June.   Accordingly, the threat to core inflation remains high, and it is expected to fall to 3% in the second half of 2024. ECB officials are sending mixed signals, and there is no unified position. Some hint at the need to take a pause, while others focus on high core inflation and urge not to stop. The European Commission has lowered its economic growth forecast for the eurozone by 0.3% for 2023 and 2024 to 0.8% and 1.4%, respectively. The inflation forecast for the current year has been reduced to 5.6%, but it has been raised to 2.9% for the following year. The European Commission believes that the ECB will raise rates by 0.25% on Thursday, claiming that the market is leaning toward this opinion.     The European Commission holds a pessimistic view of the prospects for eurozone economic growth, which does not contribute to euro demand. The value of the net long euro position fell by 1.6 billion to 18.2 billion during the reporting week. Net positioning continues to be bullish, and the trend favors selling the euro. The price is below the long-term average, which supports further euro depreciation, but the dynamics are neutral.     EUR/USD, as we suggested a week ago, broke below the lower band of the channel at 1.0764 and headed towards the local low of 1.0634. Traders will likely test the low; the question is whether the euro will break this support on the first attempt, or if a second wave will be needed. In case the euro continues to correct higher, we can expect a retracement to the resistance zone of 1.0790/0810. We consider this scenario less likely, as we believe that the euro will fall further, with the support zone of 1.0605/35 as the target. GBP/USD The pound has slightly recovered from its decline following hawkish comments from the Bank of England. Speaking in Canada, Monetary Policy Committee member Catherine Mann signaled she's likely to support further rate hikes as she sees persistent inflation harder to fight than a downturn. She also said it is a "risky bet", but it's better to make a mistake that can be corrected later, and this implies a call for further rate hikes. The labor market report for August was set to be published on Tuesday, with investors focused on the average earnings growth rate. It is expected that the 3-month measure will remain at 7.8%. Any deviation from the forecast could change rate expectations, potentially leading to increased volatility for the pound. The value of the net long pound position fell by 0.2 billion to 3.6 billion during the reporting week. Despite a fairly deep sell-off in recent weeks, net positioning continues to be bullish, which does not prevent the price from falling.   As expected, the pound successfully tested the support at 1.2545. There are almost no reasons for an upward reversal, and any potential corrective rise is limited by the resistance zone of 1.2545/65. We expect the bearish sentiment to persist. The goal is an update of the local low and a move below 1.2440, with the next target being 1.2290/2310. Here, the pound may find strong support. From a technical perspective, falling below this area would suggest the end of the long-term uptrend.  

Higher-than-expected Romanian inflation is not as bad as it looks At 9.4%, August inflation came in higher than expected but can be largely blamed on one item: drug prices. These increased by a whopping 20.8% versus the previous month. On the bright side, core inflation dropped by 1.1pp versus July, to 12.1%, and looks on track to reach single digits this year. August inflation in Romania was higher than anticipated, as we expected the headline print to be 8.70%. The forecast error on our side came almost entirely from a single item – drug prices – which advanced by 20.8% versus July and added 0.82pp to the headline figure, versus an assumption of flat prices. This has pushed the non-food items to increase by 2.43% compared to the previous month, the strongest acceleration in the last 16 months. Assuming flat drug prices, the increase would have been 0.89% – still the highest in 2023, due to the recent increase in fuel prices. Otherwise, price dynamics in the other sectors largely matched our expectations. Food prices dropped by almost 2pp versus July on seasonal items and the effect of the government ordinance which caps the mark-ups on basic food products. The latter is scheduled to expire in November, although talks about it being prolonged are already underway. Service inflation decelerated to 0.44% month-on-month, the lowest increase in the last 12 months.] Headline and core inflation converge in 2024   At 12.1%, the core inflation print confirms our view that it will reach single digits this year, most likely in November and could even dip below 9.0% in December. The outlook for 2024 remains largely unchanged, as the core is likely to stay above the headline, though the spread will get narrower and could reach zero around mid-2024.   Today's data are not as bad as the headline number suggests. Capping the mark-ups on basic food items seems to be working, services inflation looks to be softening, and even wage growth appears to be moderating slightly. Moreover, the economy is clearly decelerating, and we have recently re-confirmed our below-consensus GDP growth forecast of 1.5% in 2023. We maintain our forecast for inflation to reach 6.9% in December 2023 and 4.0% in December 2024. From a monetary policy perspective, we still believe that rate cuts can be excluded this year. The start of the easing cycle should come in the first quarter of next year, with a total of 150bp cuts by the year-end. This might be done alongside the gradual restriction on liquidity conditions in the interbank market, as the current surplus is likely not giving a lot of comfort to the National Bank of Romania. We therefore still expect that pressure on the EUR/RON will be used as an opportunity to mop up some of the excess liquidity, hence the upside room for EUR/RON still looks limited in the short term.

Euro falls to the lowest levels since May after ECB hikes rates and delivers an abysmal growth forecasts, while upgrading 2023 and 2024 inflation outlooks Post ECB decision – October 26th ECB rate hike odds hover around 35.4% US retail sales remained strong on back-to-school spending and despite the extra energy costs at the pump The euro initially spiked after the ECB raised rates, but quickly tumbled after traders digested the ECB forecasts that suggest stagflation might be here.  Shortly after, the US posted robust retail sales and jobless claims data, which basically drove home the message that the US economy will easily outperform the eurozone economy throughout the rest of the year.  Investors were thinking that the US might be poised to deliver more rate cuts than the eurozone, but that seems like that won’t be happening anytime soon.   EUR/USD – 30 minute chart   ECB The summer break is over for the ECB and they have a tough job ahead.  Inflation remains too high and that is forcing the ECB to signal that they ” will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary.” The market was split on whether they would raise rates, but when they processed the forecasts, they realized stagflation risks are here.   ECB Forecasts:  2023 GDP forecast cut from 0.9% to 0.7% 2024 GDP forecast cut from 1.5% to 1.0% 2023 GDP forecast cut from 1.6% to  1.5% 2023 Inflation forecast raised from 5.4% to 5.6% (core steady at 5.1%) 2024 Inflation forecast raised from 3.0% to 3.2%(a tick lower to 2.9% 2025 Inflation forecast lowered from 2.2% to 2.1%(core a tick lower to 2.2%) ECB’S Lagarde Press Conference When asked if she was done with rate hikes, Lagarde noted that some members preferred to pause, but that still a solid majority of members agreed with the decision.  One of the key takeaways from Lagarde is that they won’t be cutting rates anytime soon as inflation is still far from target.  Lagarde repeated this quote a few times, “based on current assessment…. the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” EUR/USD – Daily Chart   The euro might not be ready to punch a one-way ticket to the 1.05 level, but it sure seems like it is heading there.  Price action on the EUR/USD daily highlights the bearish trend has firmly been in place since mid-July.  As the risks for growth continue to deteriorate even further, the euro could see short-term weakness before a bottom is put in place.  Major long-term support could be provided by the 1.04 level, which is the 50% Fibonacci retracement of the September low to July high move. On the other side of the Atlantic, another round of US data supported USD strength after it reminded investors how strong the US economy remains; retail sales ex-auto had a fifth straight increase, producer prices came in hotter-than-expected, and jobless claims remained low.    

How do current oil prices change our inflation forecast? Despite this not being the 1970s, expectations of further disinflation will be impacted by higher oil prices. This could result in a slower decline of inflation to 2%. Given that our expectations for oil prices do include a drop in the first half of 2024 again, the effect on our own forecast is rather moderate. Plus, a smaller decline in energy prices has materialised this year compared to expectations (which impacts next year’s base effects). Assuming oil prices stay at 95 USD/b for all of 2024, however, the headline figure would rise by 0.3 pp next year, with a peak of the energy price contribution of 1 ppt in the second quarter. At the same time, higher oil prices would probably further dent consumer confidence and spending, thereby contributing to the current disinflationary trend due to weaker demand. Indeed, the big question is whether the higher oil price will once again result in broad-based second-round effects like we saw last year. A lot of drivers of core inflation are at this point still disinflationary, with manufacturing businesses still indicating that input costs are falling despite higher wages and energy prices. And as new orders are weakening, deflation for non-energy industrial goods is realistic towards the end of the year. For services, weaker demand is also contributing to slowing inflation despite higher wage costs, according to the September PMI. Our expectations are that core inflation will slow significantly from the 5.3% August reading towards the end of the year. Still, if the labour market remains as tight as it is now and the economy bounces back a bit in early 2024, there is a risk that higher energy input costs would also put core inflation further above 2%. A lot depends on the strength of the economy in the months ahead, adding uncertainty for the ECB.   Pressure on the ECB to continue hiking Prior to the pandemic, most central banks would probably have looked past surging oil prices. Some even considered rising oil prices to eventually be deflationary, undermining purchasing power and industrial competitiveness. However, we are no longer in the pre-pandemic era, but the era of returned inflation. The ECB has emphasised in recent months that doing too little is more costly than doing too much in terms of rates. For the ECB, the recent staff projections were based on the technical assumption of an average oil price of 82 USD/b in 2024. If oil prices were to average 95 USD/b next year, this would probably push up the ECB’s inflation forecasts to 3.3% for 2024 (from 3.2%) and more importantly to 2.4% in 2025 (from 2.1%). As a result, the return to 2% would be delayed to 2026. The delayed return to 2% would not be the only reason for the ECB to consider further rate hikes. Even though the ECB would still acknowledge the deflationary nature of a new oil price shock, the risk that this new oil price shock could lead to a de-anchoring of inflation expectations will definitely add to the ECB’s concerns, making not only an additional rate hike more likely, but also that they stay higher for longer.

Bank of England keeps rates on hold at 5.25% By Michael Hewson (Chief Market Analyst at CMC Markets UK)   The Bank of England left rates unchanged at 5.25% which was as expected however anyone who thought there might be a dovish tilt to the decision would have been disappointed with 6 holds and 3 votes for a 25bps rate hike, from Catherine Mann, Megan Greene, and Jonathan Haskel   The central bank also revised its inflation forecast for 2024 higher by 75bps to 3.25%, while nudging the forecast for 2023 down by 25bps to 4.75%. The growth forecasts were disappointing with 2023 left unchanged at 0.5%, while 2024 was downgraded to 0% from 0.5%.   On the inflation forecast it looks like good news for the government in that we are on course for inflation to halve by the end of the year, although it won't be because of anything the politicians have done but merely a consequence of the natural evolution of slowing prices and a slowing economy.   Despite the bleak outlook it was made clear that interest rates were likely to remain higher for longer and that there was no consideration given to rate cuts. Policy would need to remain restrictive suggesting that the MPCbelieves that inflation is the bigger enemy for the moment, and rate cuts would run counter to that outcome as they would weaken sterling.   Governor Bailey was at pains to point out that services inflation remained high and that while wage growth was higher, the MPC believed it was below the 7.8% average in the most recent ONS numbers, trending at around 7%. That said inflation risks remained skewed to the upside, with the bank saying they expect annual pay settlement growth to slow to between 6% to 6.5%. The bigger challenge won't be getting inflation down, but will be in returning it to the 2% target, given that the neutral rate could be closer to 3%.   The pound edged higher against the US dollar, while UK 10-year gilt yields slid to 3-week lows on the back of today's decision with the next focus expected to be on the October inflation numbers, which are a week before the Autumn Statement. It is becoming ever clearer that the Bank of England is done when it comes to further rate hikes, and that the next move is likely to be a cut, although when that happens is anyone's guess.

Continued improvement in Turkey’s underlying inflation trend Annual inflation has remained at 61-62% for a third consecutive month with a better-than-expected monthly November figure. The underlying trend continues to improve. With another better-than-expected monthly reading at 3.3% (vs the consensus at 3.9% and our call at 3.8%), annual inflation in Turkey recorded a slight increase to 62% from 61.4% a month ago. The data reflect elevated upward pressures in services and the impact of natural gas prices. October PPI, on the other hand, stood at 2.8% MoM, translating into 42.2% YoY. The decline in annual PPI from close to triple digits at the end of last year shows improvement in cost pressures despite a Year-on-Year increase in the Turkish Lira equivalent of import prices lately due to commodity price developments and exchange rate increases. Core inflation (CPI-C) came in at 1.96% MoM, inching up to 69.9% on an annual basis on the back of pricing behaviour, exchange rate developments, adjustments in administered prices and inertia in services. However, the underlying trend (as measured by 3m-ma, annualised percentage change, based on seasonally adjusted series), which dropped in October, maintained its recovery in November with a continued decline in not only the core but also the headline rate of goods and services inflation.   Inflation outlook (%)   In the breakdown, all main expenditure groups, with the exception of clothing, positively affected the headline: Among them, housing turned out to be the major contributor with 1.44ppt due to natural prices as households exceeded the free natural gas usage limit. Accordingly, energy inflation jumped to 21.2% from 11.6% a month ago. This was followed by food with 0.74ppt, though annual group inflation moderated to 67.2% (vs the CBT assumption at 66.7% in the latest inflation report release) on the back of both processed and unprocessed food. However, price pressures in processed food were still high, with the second-largest November increase in the current inflation series. 33ppt contribution, on the other hand, was attributable to alcoholic beverages and tobacco with adjustments in cigarette prices. On the flip side, clothing recorded a slight price decline on the back of seasonality. As a result, goods inflation moved slightly up to 52.1% YoY, while core goods inflation receded to 52.2% YoY. Annual inflation in services, which is significantly influenced by domestic demand and wage hikes, maintained its uptrend and reached another peak at 89.7% YoY, attributable to the continuing rise in rents, transportation and telecommunication services.   Annual inflation in expenditure groups   Overall, annual inflation has remained in the 61-62% range for the last three months as pass-through from the post-election adjustment in FX, wages and taxes is reflected in the prices. The monthly trend of inflation may continue to improve if:  currency stability is maintained, adjustments in wages and administered prices prioritize inflation concerns, the impact of geopolitical issues on oil prices remains under control  domestic demand sustains its moderation path. We expect inflation to remain elevated until mid-2024, with further increases above 70% on seasonal effects in January and unfavourable base effects in May. The second half of next year will likely see a sharp downtrend – reflecting this year’s high base and further impact of tighter policy, pulling inflation to 40-45% by the end of the year. At the November MPC meeting, the CBT raised the one-week repo rate to 40.0%, providing guidance that: the pace of monetary tightening would slow the tightening steps would be completed in a short period of time, the monetary tightening required for sustained price stability would be maintained as long as necessary. Accordingly, we expect that the interest rate hike process will be completed at 45.0% with more limited increases of 250 basis points in December and January meetings. However, better-than-expected inflation readings and currency stability may also lead the bank to end the hiking cycle after a single 250bp hike.

Philippines central bank leaves key rate untouched to close out the year BSP kept policy rates unchanged at 6.5% at their last meeting for the year.   BSP maintains policy rate at 6.5% The Bangko Sentral ng Pilipinas (BSP) retained policy rates at 6.5% today, in line with market expectations. The BSP continues to use the “risk-adjusted” forecast as opposed to the baseline inflation forecast, which was lowered to 4.2% (from 4.4% previously). For 2025, thecentral bank expects inflation to settle within target at 3.4%.  BSP Governor Eli Remolona indicated that risks to the inflation outlook remain “substantially tilted to the upside” while also sharing that growth prospects for next year remain “firm”.  Remolona indicated that inflation expectations are now anchored, citing their private sector analysts survey. Previously, the BSP justified their off-cycle rate hike by indicating that consumer expectations for inflation were elevated.    BSP keeps policy rates untouched as inflation moderates   BSP on hold but not likely to cut anytime soon Remolona indicated that they would be monitoring the response of households and firms to tighter monetary policy, suggesting they would be waiting to see the impact of previous rate hikes on the inflation path. The central bank will likely extend its pause until inflation is “well-within” target and until inflation expectations are anchored.  We expect the BSP to be on hold well into 2024, with potential rate cuts only likely to be considered towards the end of next year.  

Eurozone, German Service PMI ease in December Euro snaps four-day rally The euro has snapped a four-day winning streak on Friday. In the European session, EUR/USD is trading at 1.0949, down 0.38%. The euro has enjoyed a strong week, with gains of 1.77%. Soft Eurozone, German services PMIs weigh on euro Eurozone Services PMI eased in December, indicating that the economy continues to struggle. The PMI fell from 48.7 to 48.1 and missed the consensus estimate of 49.0. This marked a fifth straight month of contraction in the services sector, with 50 separating contraction from expansion. Germany, the largest economy in the eurozone, also reported a decline, with the PMI falling to 48.4, down from 49.6 in November and short of the consensus estimate of 49.8. Euro soars after ECB pause The European Central Bank held the benchmark rate at 4.0% for a second straight time on Thursday. This move was expected, but the central bank pushed back against market expectations for interest rate cuts next year, sending the euro soaring 1.09% against the US dollar after the announcement. ECB President Christine Lagarde reaffirmed that the Bank would continue its “higher for longer” stance, saying that the Bank was not about to let down its guard and lower rates. Lagarde sounded hawkish even though the ECB lowered its inflation forecast at the meeting. Inflation has fallen to 2.4% in the eurozone, within striking distance of the 2% target. Lagarde acknowledged that inflation was easing but said that domestic inflation was “not budging”, largely due to wage growth.   There is a deep disconnect between the markets and the ECB with regard to rate policy. ECB President Lagarde poured cold water on expectations for rate cuts, arguing that inflation had not been beaten. The markets are marching to a very different tune and have priced in at least in around six rate cuts in 2024 and are confident that Lagarde will have to change her stance, with inflation falling and the eurozone economy likely in recession. . EUR/USD Technical EUR/USD is testing support at 1.0957. Below, there is support at 1.0905 1.1044 and 1.1096 are the next resistance lines    

Bank of Japan stays on hold, UK public finances in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw a cautious but broadly positive start to the week, despite weakness in basic resources which served to weigh on the FTSE100. US markets picked up where they left off on Friday with new record highs for the Dow, S&P500 and Nasdaq 100 although we did see a loss of momentum heading into the close, as US yields rebounded off their lows of the day.   The tentative nature of yesterday's gains appears to be being driven by a degree of caution ahead of some key risk events over the next couple of weeks, starting today with the latest Bank of Japan policy decision. This is set to be followed by the European Central Bank on Thursday, and then the Fed and Bank of England next week.   For most of this month central banks have been keen to reset the policy narrative when it comes to the timing of rate cuts which had markets pricing in the prospect of an early move. While US markets have managed to shrug off the prospect of a delay to possible rate cuts, markets in Europe have struggled with the concept probably due to the weakness of the underlying economy relative to how the US economy has been performing. There is a sense that the ECB is over prioritising the battle against inflation which is coming down rapidly and not seeing the damage that is being done to the wider economy by keeping rates higher than they need to be.   Today's Bank of Japan decision didn't offer up any surprises with the central bank keeping monetary policy unchanged against a backdrop that has seen market expectations of rate cuts from other central banks increase markedly since the last Fed meeting. This shift in expectations has helped to ease some of the pressure on the BoJ to look at tightening policy itself to slow the decline of its own currency. The bank also cut its inflation forecast for this year from 2.8% to 2.4%, while nudging its 2025 forecast slightly higher to 1.8%.   Asia markets have seen a more upbeat session on reports that Chinese authorities are looking at a package of stimulus measures to help stabilise the stock market, which could come as soon as next week. Despite this more positive tone European markets look set to open only modestly firmer, with the only economic data of note due today being the latest public finance data from the UK for December.  As far as UK government borrowing is concerned rising interest costs at the beginning of Q4 served to exert upward pressure on the headline numbers, pushing borrowing up to £16bn in October, the second highest October number since 1993. Since those October peaks, gilt yields have declined sharply, along with headline inflation, helping to ease borrowing costs in the mortgage market. This weakness has also come as a welcome relief to the Chancellor of the Exchequer, after UK 10-year yields fell to a low of 3.44%, down from a peak of 4.73% in October. These lower interest costs are likely to see December borrowing slow to £14.1bn, while January could see a surplus as end of year tax payments boost the numbers.     EUR/USD – currently has support at the 200-day SMA at 1.0840. A break below here and the 1.0800 level targets the 1.0720 area. Currently capped at the 50-day SMA with main resistance up at 1.1000.  GBP/USD – remains resilient with support just above the 50-day SMA and 1.2590 area. We need to get above 1.2800 to maintain upside momentum. Also have support at the 200-day SMA at 1.2550. EUR/GBP – continues to find support at the 0.8540/50 level which has held over the last 2-months. A fall through here could see further falls towards the 0.8520 area. We still have resistance at the 0.8620/25 area and the highs last week. USD/JPY – has retreated modestly from the 148.50 area but remains on course for the 150.00 level. Pullbacks likely to find support at the 146.25 level cloud support as well as the 50-day SMA. FTSE100 is expected to open 15 points higher at 7,502 DAX is expected to open unchanged at 16,683 CAC40 is expected to open 7 points higher at 7,420

Expect the Bank to drop its tightening bias Financial markets expect the Bank Rate to be one percentage point lower in two or three years' time than was the case in November. That will have important ramifications for the Bank’s two-year inflation forecast, which is seen as a barometer of whether markets have got it right on the level of rate cuts priced. Previously, the Bank’s model-based estimate put headline inflation at 1.9% in two years’ time, or 2.2%, once an ‘upside skew’ is applied. We wouldn’t be surprised if this ‘mean’ forecast (incorporating an upside skew) is still a little above 2% in the new set of forecasts. And if that’s the case, it can be read as the BoE subtly pushing back against the quantity of rate cuts markets are pricing in. If that happens, we suspect markets will largely shrug it off. The bigger question is whether the Bank makes any changes to its statement – and its forward guidance currently reads like this: Policy needs to stay “sufficiently restrictive for sufficiently long.” It’s likely to stay restrictive for “an extended period of time.” “Further tightening” is required if evidence of “more persistent inflationary pressures.” We think the baseline assumption going into this meeting is that the last of those sentences gets dropped and that the three hawks who'd been voting for a rate hike in December finally throw in the towel, given the recent run of inflation data. A hawkish surprise is, therefore, a statement that looks much the same as December’s, with at least one or two committee members voting for a further rate hike. A dovish surprise would see the Bank remove or water down the sentence on how long policy needs to stay restrictive. There’s also a tail-risk that Swati Dhingra, known to be the most dovish committee member, votes for a rate cut, though our base case is a unanimous decision to keep rates unchanged (6-3 previously).     Markets seem more sensitive to dovish nuances of late The market discount for BoE rate cuts has moderated. At the end of last year, a first cut by May was still fully discounted, and overall more than six cuts were fully priced in for 2024. This has come back towards slightly more than 50% implied probability of a May cut and four cuts overall being priced in. These are not unplausible scenarios but are obviously dependent on data and, for instance, the government's tax plans. But looking at markets more globally, they appear more sensitive to softer data and any dovish nuances provided in communications. As such, we do see a possibility for front-end rates to tick slightly lower if the MPC, for instance, removes its hike bias - in its commentary as well as the voting split. Further out the curve 10Y gilt yields have risen back towards 4% from around 3.5% at year-end. But yields appear capped at 4%, facing resistance to move higher. If we take a simple modelling approach, augmenting a short-term money-market-based estimate of the 10Y gilt with yields of its US and German bond peers, we conclude that gilts see slightly too high yields already. Keep in mind that the BoE meeting is flanked by the Fed meeting, jobs data in the US, and the CPI release in the eurozone, which should be crucial in driving wider sentiment. When it comes to FX markets, sterling has been the best-performing G10 currency against the dollar this year. Its implied yield of 5.2% means that it is the only G10 currency up against the dollar on a total return basis this year. As above and given that the market is minded to look for the more dovish interpretation of central bank communication in what should be a year of disinflation, the idea of the BoE playing dovish catch-up with the Fed and the ECB could be a mild sterling negative.  That probably means that EUR/GBP will struggle to maintain any break below strong support at 0.8500 in the near term, and the BoE event risk means EUR/GBP could start to trade back over 0.8600.  However, our end-quarter target of 0.8800 looks too aggressive now. Scope for tax cuts in early March, sticky services inflation and composite PMI readings comfortably above 50 in the UK could well mean that EUR/GBP traces out a 0.85-0.87 range through the first half of this year. For GBP/USD, the FX options market currently prices a very modest 42 USD pips of day event risk around the Wednesday FOMC/Thursday BoE meeting. Our baseline scenario assumes GBP/USD could trade back down to/under 1.2700 on Thursday, especially should the FOMC meeting have disappointed those looking for a March rate cut from the Fed.

CZK: Changing our central bank call to a 50bp rate cut The blackout period for the Czech National Bank (CNB) began yesterday and we will therefore probably not hear anything more. Deputy Governor Jan Frait really moved the market when he said he was open to a larger rate cut, even more than 50bp at the 8 February meeting. We do know that the deputy governor was one of two board members who voted for a rate cut back in November when the CNB left rates unchanged. So the new statements aren't exactly a game changer, but we have confidence that at least two members will push for a 50bp rate cut at next week's meeting. In addition, the board will have a new forecast which we think should show very low inflation of below 3% for the upcoming months. Overall, this leads us to reassess our call from a 25bp to 50bp rate cut next week. The acceleration of the rate cut is bad news for the CZK. However, we believe positioning has been heavily short here for some time and should not be so damaging. Moreover, the market is already pricing in a large portion of the rate cuts. Therefore, we do not expect significant weakness from this, but of course a short trip above 25.0 EUR/CZK is likely next week.