The FOMC meeting in the US
|On global markets: This week's main event for the EURUSD will, without question, be the FOMC meeting in the US. An interest rate hike is widely expected. The market focus will be on the guidance for the future path of the US key interest rate.
CEE currencies: The Czech koruna has finally slightly appreciated, but it is definitely still far from the central bank's expected level. While the central bank will very likely pause in its hiking cycle at its MPC meeting held this Thursday, the discussion on the further need for tightening will continue, with the most likely outcome being that the bank will see where inflation and the CZK are in January and hike afterwards if needed. The recent drop in inflation seems temporary and the central bank expects inflation to return to above the inflation target at the beginning of next year. We see the Czech koruna as the best-performing currency in 1Q19, appreciating towards 25 EURCZK in 1Q19.
CEE rates and yields: Lower inflation readings for November left a mark on yield development last week. 10Y yields went further down in Poland (-10bp w/w) and Romania (- 20bp w/w) last week. In Romania, we have changed our call for the interest rate outlook for next year. Given that inflation is likely to stay within the central bank's target range and core inflation has slightly eased, we do not expect any rate hike throughout next year. Romania's 10Y yields dropped below 4.7%, a level last seen in May. We still expect yields to climb back above 5% in the coming months, as the government will struggle to keep the budget under control. The budget proposal being discussed in the parliament is based on forecasted 5.5% GDP growth while the recent forecasts point much slower growth (3.4-3.6%). Slower growth will unmask the structural deficit built up in recent last years and make consolidation much harder and politically costly. And this will happen at a time when the ruling government has lost the majority in the parliament and has to rely on the support of smaller parties.
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