Economists at ING believe that Eastern European currencies (CEE) have limited upside potential and that the CEE rally is slowing down. While positive conditions continue to prevail in the CEE FX market, experts expect the current rally to begin running out of steam due to several factors.
Firstly, the euro and US dollar (EUR/USD) are struggling in their quest to reach the 1.10 mark, impeding progress in the CEE FX market. Moreover, experts do not envision much room for further risk premium reduction in the emerging market (EM) space. Additionally, this week’s inflation numbers may cause dovish expectations to return to the region, which could put a stop to the current FX rally.
Despite these obstacles, the Czech koruna and the Hungarian forint emerge as the top currencies, but their capacity for appreciation is becoming increasingly limited. ING analysts predict a gravity point of 23.30 EUR/CZK and 375 EUR/HUF in the future.
The CEE economies have witnessed positive growth and have been trying to keep up with a fast-paced world riddled with tense geopolitics, especially during the COVID-19 pandemic. The region has experienced a slowdown due to issues like inflation, debt and weakening growth, and these ongoing risks may lead to a subdued recovery. The current economic outlook highlights the struggles faced by Eastern European economies, which face challenges on various fronts.
Impact of the geopolitical situation
Being located in a geopolitically sensitive region, Eastern European countries are no strangers to crises. The tension between Russia and Ukraine or the recent migration crisis at the Poland-Belarus border are just a few examples that reflect the region’s volatility. The ongoing power dynamics among regional, continental and global actors make it difficult for CEE economies to find stable footing and maintain economic stability.
COVID-19 and economic recovery
Like the rest of the world, Eastern Europe was not immune to the negative effects of the COVID-19 pandemic. Most CEE countries faced significant economic contractions, with travel restrictions and lockdown measures disrupting supply chains and hampering growth. Many governments in the region have implemented fiscal stimulus measures to counter the pandemic’s impact, but the subsequent debt burden may affect the countries’ long-term recovery.
Structural challenges
CEE countries face various structural challenges that impede their economic growth, ranging from high public-sector debt to aging populations. Limited labor force growth and outdated infrastructure are also ongoing concerns for the region. Addressing these issues is essential for sustaining long-term economic stability in Eastern Europe.
Inflation and central banks’ response
With global inflation on the rise, CEE countries are also facing the challenge of rising prices. In response, some central banks in the region have started tightening monetary policy in a bid to tame inflation. However, higher interest rates may stifle economic growth, especially if the current inflation surge proves to be temporary.
Potential for CEE currencies
Despite these challenges, CEE currencies may still hold some potential for investors, given their relatively higher yields compared to other emerging markets. Despite a challenging economic environment, Eastern European currencies have shown resilience in recent months, though appreciation opportunities appear to be dwindling.
In conclusion, while the outlook for Eastern European currencies may be less optimistic than it once was, potential opportunities still exist. Investors should keep a close eye on the developments in the region’s FX market to take advantage of any potential gains. As with any investment, diversification remains key, particularly given the elevated risks and uncertainties surrounding the global economy.
