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The war at Europe’s eastern border weighed heavily on the common currency, hurling EUR/USD back to levels not seen since the 2020 pandemic year. The focus returned to reigning market themes in the meantime. In this respect, the ECB’s hawkish shift protects EUR/USD’s downside. A solution to the geopolitical conflict may be required for the pair to start a sustained comeback.
EUR/GBP remains trapped near YTD lows. Sterling/UK money markets do not buy into a cautious BoE normalization narrative. A 2% policy rate by year-end is discounted. As in EUR/USD, EUR/GBP’s downside is better protected though thanks to the ECB.
Monetary policy divergence and higher core/US real rates launched USD/JPY to the highest levels since 2016. High commodity/oil prices weigh on the yen as well with Japan being a net energy importer.
The currency fall-out of the war in Ukraine was the biggest on nearby countries, including in Central Europe. The Czech National Bank (CNB) intervened in FX markets to stabilize the koruna. The central bank will also raise rates more and keep them restrictive for longer than previously envisaged. Calm meanwhile returned, allowing the koruna to appreciate close to pre-war levels as the underlying fundamentals remain solid.
The forint hit a record low of EUR/HUF 400. The central bank re-introduced the use of the weekly deposit rate to stem the currency’s decline. Along with improved sentiment, the forint pared losses to a still-weak EUR/HUF 370. The Hungarian central bank already announced a longer and more aggressive tightening cycle as inflation is expected to rise to even higher levels.
The zloty was caught in the risk-off slipstream with a subsequent recovery as the dust settled somewhat. The NBP also intervened in the currency market. It hiked by a more than expected 75 bps in early March with more definitely to come. A significant comeback by the zloty (as well as the forint) is probably difficult as long as the war drags on.
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