The Republicans hold the majorities in both chambers of the US Congress

On global markets: On Tuesday, all seats in the House of Representatives and one-third of seats in the Senate will be awarded in the course of the mid-term elections. Currently, the Republicans hold the majorities in both chambers of the US Congress. The outcome is completely open. Current polls show several very tight races, making both a change in majorities as well as a continuation of the status quo possible. The meeting of the Federal Open Market Committee (FOMC) this week has little potential for surprises. On Thursday, after the end of the meeting, an unchanged bandwidth for the key interest rate should be announced. However, at the same time, the committee will leave no doubt that the course of further gradual interest rate hikes will continue. In our view (and the markets'), the next rate hike in December is all but certain.

CEE currencies: The Czech koruna went to a 3-month low shortly before the CNB meeting on Thursday, provoking the central bank to deliver its fifth rate hike this year. According to the CNB's FX projection, the central bank sees the average EURCZK exchange rate at 24.7 and 24.2 in 2019 and 2020, respectively. At this moment, we expect the koruna to appreciate below the 25 mark in 1Q19, but any kind of slippage would likely trigger more than just the one rate hike penciled into our current forecasts. FX trading activity was rather low last week, due to many public holidays in the region. The Hungarian forint gained almost 1% vs. the euro in the second half of the week.

CEE rates and yields: If the koruna starts appreciating again, we expect the CNB to deliver only one additional hike in roughly the middle of next year, as the appreciating koruna should tighten monetary conditions sufficiently. This is the baseline scenario in our forecast. However, if the koruna remains weak during the next year, the CNB will hike three times, in our view. In 2020, the CNB will add two additional 25bp hikes.


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