BUDAPEST: A rise in Czech inflation boosted the crown on Monday, while selling of Hungarian government bonds knocked the forint to a 23-month low against the zloty, its Central European peer.
Local factors have had little impact on the region's currencies for several weeks as they have been overshadowed by a rally in the dollar and US government bond yields, which led to a sell-off in emerging markets in May.
Investors were sitting tight on Monday ahead of policy-setting meetings at the Federal Reserve and the European Central Bank later this week.
The crown strengthened by half a percent against the euro, trading at 25.661 at 1240 GMT, after Czech data showed a pick-up in annual inflation to 2.2 percent in May from 1.9 percent in April.
That was higher than a Reuters poll forecast for 2 percent and the CNB's 2 percent target.
The crown remains weaker than the CNB's forecasts and senior officials of the bank reaffirmed last week that the currency's weakness could create more room for further monetary tightening to defend the inflation target.
The bank said the May inflation data signalled a slight upwards risk compared with its forecast, mainly lifted by fuel and food prices.
A November rate hike by the bank remains likely, but the probability of an August hike has risen above 40 percent, Erste analysts said in a note.
Citigroup analyst Jaromir Sindel said in a note that the stronger price index was likely to lead to a rate hike in August.
The crown outperformed the zloty which gained 0.3 percent, and the flat leu.
The forint, meanwhile, shed 0.4 percent against the euro and was trading at its weakest level since mid-2016 against both the single currency and the zloty, after moving more or less in tandem with the Polish unit for months.
Its weakening came in tandem with a jump in Hungarian government bond yields.
Hungarian bonds outperformed regional peers around the end of 2017 as the National Bank of Hungary had pledged to keep long-term yields relatively low via its unconventional tools. But yields surged in May during a sell-off in emerging markets.
After a regional retreat in recent weeks, Hungary's 10-year yield has been rallying, and it came close to May's peak on Monday. Yields on US Treasuries and Bunds rose much less, while Poland's 10-year yield dropped 3 basis points.
"Now that (international factors) are not as favourable as in recent years, the market is testing the central bank," one Budapest-based trader said.
The NBH has consistently pledged to keep monetary conditions loose, reiterating this message at the last rate setting meeting in May. The bank will hold its next rate meeting on June 19.
Its base rate is at a record low of 0.9 percent, while the overnight deposit rate is at -0.15 percent.
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