EUR/USD has remained in a sideways movement

On global markets: Market speculations have started whether the ECB will adapt a more "symmetrical" nature to its price stability target, which would probably dampen short-term interest rate expectations for a longer period of time, so that inflation rates above 2% can be achieved in the longer term. Next week, we expect the ECB to open up more room for maneuver and change its forward guidance on interest rates. This would prepare markets for the possibility of interest rate cuts. In the US, the Q2 GDP will be released. EURUSD has remained in a sideways movement.

CEE currencies: The story on global markets remains the intensifying expectations for lower rates, which, amid the relative scarcity of local news during summer holidays, is force majeure for CEE markets, too. Unsurprisingly, regional currencies somewhat benefited from these ever-lower global interest rate expectations last week. On the other hand, export prospects are worsening after poor car registration data for Europe was released. It is hard to tell the extent to which the lower amount of working days in June played a role in this poor reading, which also certainly impacted the Polish releases last week. However, the demand slowdown on German markets is definitely having at least some impact, and thus the outlook for exports is not the best at the moment. As domestic demand is still booming in CEE, this could put pressure on net exports and thus on currencies as well. The HUF was the weakest currency in the region for some days last week, given the very dovish central bank behavior. One should not expect major weakening of regional currencies either, however, even for the HUF. This is due to the fact that the region is (perhaps apart from Croatia) having stronger inflationary pressure than the Eurozone, which speaks against local central banks embarking on monetary easing to the same extent that is becoming increasingly likely in the Eurozone and the US.

CEE rates and yields: The fall of German Bund yields last week triggered yield decreases in CEE markets as well, but there were some differences across the countries. In Hungary and Poland, where nominal yields are still above 2 percent and fiscal developments are not very worrisome, spreads against Bunds further compressed. Unsurprisingly, regional countries that are already inside the Euro Area also strongly benefited, with the Slovak 10Y ask yield falling below zero percent for the first time in history. Romanian yields also fell, albeit to a lesser extent, unsurprisingly due to the ongoing fiscal woes there. Markets are waiting for exact plans on how pensions will be taxed, but the market is flush with liquidity, as demonstrated by the huge interest at last week's 2020 RON government paper auction. In Serbia – where the policy rate was cut earlier in July by 25bp to 2.75% - the fact that the NBS continued to intervene on the FX market to fend off inflows makes us think that additional rate easing might come soon from the central bank. Czech yields failed to follow this trend, but this is due to the relatively hawkish central bank. Going forward, CEE yields could continue to be heavily affected by major market bond developments.

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