FX pressured by slowing inflation, renewed Hormuz tensions

Central European currencies weakened on Tuesday after data pointed to slowing inflation, cooling expectations for more restrictive monetary policy and as renewed tension in the Middle East generated risk aversion.

The Czech crown OANDA:EURCZK slipped 0.2% to 24.2050 per euro by 0752 GMT after data showed Czech inflation in June slowed to 1.5% year-on-year, compared to 2.1% in May and analysts' forecasts of 1.9%.

Though "domestic inflation has currently moved below the CNB's 2% target, we do not expect the set monetary policy rate to change," said Martin Komrska, chief economist for UniCredit in Prague.

"By tightening monetary policy in June, the central bank has created space to more calmly analyse both the development of core inflation and the leakage of secondary inflationary effects from the Hormuz crisis in the coming months."

With the data calendar for Tuesday relatively sparse, economists suggested technical factors and geopolitics may guide currency moves. Oil prices started rising again on reports of the first Iranian attacks in the Strait of Hormuz in nearly two weeks.

"This may result in slightly higher volatility in the EUR/PLN exchange rate," analysts at Bank Millennium wrote in a note.

"The attacks in the Strait of Hormuz and the weakening sentiment surrounding Asian technology companies may support the dollar today and negatively impact the zloty and domestic assets."

The zloty OANDA:EURPLN was down 0.1% at 4.2935 per euro.

Investors are awaiting a decision by Poland's Monetary Policy Council on interest rates on Wednesday, followed by a press conference by the central bank governor on Thursday.

The Council is expected to keep interest rates unchanged in July, a Reuters poll showed. While June inflation was at target, the rate of price rises is likely to increase in the months ahead, according to analysts.

Elsewhere, the Hungarian forint FX:EURHUF lost 0.24% to 354.50 per euro. Inflation in Hungary slowed to 1.7% in June, from 1.8% a month earlier.

"In our view, today's inflation data cements the July interest rate cut and unless we see another geopolitical escalation, the August cut can presumably also be considered a certainty," said ING's Peter Virovacz.

Hungary sold €3 billion ($3.43 billion) of Eurobonds in its first international bond issue since April's election, the government debt agency AKK said in a statement late on Monday.

Stock markets in the region were mixed, with Warsaw GPW:GPW losing 1.1% while the main index in Prague PSECZ:PX gained 0.3%.