The EUR/USD will be the release of the flash estimate of Eurozone inflation for August and July

On global markets:

This week, the most important macro releases for the EURUSD will be the release of the flash estimate of Eurozone inflation for August and July PCE inflation data for the US. While the former hardly bears any risks of a surprise, the impact of the latter on markets is more uncertain. Markets will be looking for indications of whether the signs of rising US inflation during the last few months are confirmed. On the political front, it could become clear this week whether a new government can be formed in Italy or early elections are unavoidable.

CEE currencies:

Currencies fared the negative sentiment that appeared on global markets towards the end of last week relatively well, apart from the Hungarian forint, which weakened to its lowest this year as the EURHUF rate breached 328. Technically speaking, this could open room for further weakening of the forint. As for the fundamentals, however, the forint seems to have started to correlate very strongly with the excess liquidity on the interbank market; while this has granted the HUF a helping hand until early to mid-August, the strong increase in liquidity since then has undermined the HUF's strength. As the amount of squeezed out liquidity now reached desired MNB levels, the chance of further, strong HUF depreciation may have faded. In Croatia, where the intervention of the CNB was provoked by continuous inflows, the kuna could remain even more stable than in the past, also in preparation for increasingly likely ERM II entry.

CEE rates and yields:

Last week brought a huge increase in yield spreads, amid global markets turning less aggressive in expecting further, global rate declines. However, what really only happened is that spreads above German Bunds in the Czech Republic, Poland and Hungary roughly returned to ranges more typical of the last few years. A very important outlier from this development is the Croatian market, where HRK yields continued to plummet, actually quite substantially last week. Current yield levels are very close to our forecasts. As for Serbia, after the two rate cuts delivered by the NBS, the amount of interventions fell substantially on the dinar market. The lower pressure makes us think that the central bank will remain in wait-and-see mode and not cut borrowing costs further this year.

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