Zloty firmer as Polish easing path questioned, crown at fresh high

The zloty gained a third straight session on Monday as central Europe's currencies found support from a weaker dollar, with eyes this week largely on a likely Polish interest rate cut that could still provide a jolt.

In the Czech Republic, the crown hit a fresh 20-month high against the euro, shaking off weak manufacturing data.

Poland's central bank remains in easing mode even as peers in Central Europe put rates on hold, and policymakers in Warsaw are expected to deliver a 25-basis-point rate cut when they conclude a policy meeting on Wednesday.

But questions remain over what may come after that cut, with the bank weighing lower-than-expected inflation against higher budget deficits, which could raise concern.

The zloty EURPLN added 0.3% to 4.254 per euro on Monday, continuing a gradual rise since hitting a three-week low of 4.276 last week.

"The outcome of the (Polish) Monetary Policy Council meeting may be a source of volatility this week," ING analysts said.

"While we assume the Council will decide to cut interest rates by 25 basis points, the narrative shaping expectations regarding the MPC's next moves remains a risk."

ING said a cautious outlook on easing could give the Polish currency a boost due to a still-attractive carry trade.

The weaker dollar - ahead of U.S. labour market data this week that could impact the Federal Reserve's easing path - gave a boost to central Europe's currencies despite some downbeat data on Monday.

Polish manufacturing contracted for a fourth straight month in August, while Czech activity also stayed in a downturn, purchasing managers' indices showed on Monday. Hungarian manufacturing also slipped into contraction, highlighting a continued weak spot in central Europe's recovery.

The Czech crown EURCZK had inched up 0.1% by 1000 GMT, trading at 24.429 per euro after earlier hitting its highest since December 2023. While manufacturing remains subdued, gross domestic data last week showed household demand was fuelling growth in the second quarter.

"The Czech crown has been one of our highest bullish conviction views this year," Deutsche Bank said in a note.

"Having performed well against both the euro and (zloty), ... we remain structurally bullish. Indeed, we see the Czech exchange rate as one of the best expressions of the regime shift in German fiscal and defence policy," analysts added, referring to an expected spending boom in central Europe's main trading partner.

Elsewhere, Hungary's forint EURHUF rose 0.2% to 395.50 to the euro and Romania's leu EURRON was steady at 5.0718. Stock markets also mostly gained, led by a 0.6% rise in Budapest BUX.