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  • With a Euro Area recession in H2 now GS base case, CE3 currencies are likely to remain under pressure as they feature a larger exposure to a fall in European demand relative to other EM currencies and also a direct exposure to the gas supply disruptions (in particular Hungary).
  • And, with the Euro also struggling for the same reasons, GS suggests that CE3 could see the largest downside in EM FX if EUR/USD does break sustainably below parity.
  • As such, FX stability depends more than ever on the support from all the tools in the policy cupboard and, for this reason, GS continues to expect CZK to outperform its regional peers given the Czech National Bank's ample reserves and historical institutional credibility.
  • In particular, this week’s CNB rate decision will be important to watch to better understand the reaction function of the new board.
  • GS economists are looking for a 25bp hike against a split consensus (between 25bp and on hold), though this is a low conviction view.
  • Still, in the event of a dovish surprise, GS thinks the CNB’s ability to intervene in the FX market should cushion the blow for the Koruna.

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