The race to the bottom begins for CE3 central banks

Whilst central banks across developed markets looks close to calling an end to policy tightening, for CE3 economies, the focus of monetary policy is now definitively on the prospect of rate cuts. Inflation is falling, and despite sharp economic slowdowns, green shoots of growth are beginning to reappear. For some, this process has already started with the NBH beginning to normalise policy and the NBP stunning markets with a surprise jumbo rate cut this month. Granted, the move to more accommodative monetary policy stances should help support the recovery currently underway across the region. But with rate differentials a key factor in pushing the respective currencies to their current elevated levels, policy easing should produce a turnaround for CE3 FX strength as carry positions are unwound. Given this, we expect to see the sell-off in CE3 currencies accelerate over the second half of the year, though the speed and timing of this retracement remains to be seen. Risks are skewed towards faster than expected depreciation across CE3 currencies, with the NBP’s latest policy decision highlighting the risk posed by faster monetary easing, while a sharper-than-expected slowdown in the eurozone economy also poses a downside risk.

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Author: 

Nick Rees, FX Market Analyst

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