Zloty softens, FX watches Italy-EU budget battle

BUCHAREST: Poland's zloty eased while other Central European currencies were virtually unchanged in cautious trade on Tuesday due to uncertainties over Italy's budget plans that are to be discussed by the European Commission at a meeting later in the day.

Central Europe is tightly integrated economically with the euro zone, and investors are keenly watching for any further market impact arising from Italy's tensions with Brussels over its expansionary spending and overly optimistic projections.

The zloty fell 0.2 percent to 4.2981 against the euro by 0932 GMT, the most sensitive among its regional peers to the single currency's moves in response to Italy's budget woes.

The Czech crown was flat at 25.83 and the Romanian leu traded virtually flat at 4.6680. Budapest markets were closed for a holiday.

"The risk of a challenging attitude by the Italian government continuing looks elevated. Given this, expect the euro to stay on the defensive," ING Bank said in a note.

The euro fell towards a two-month low earlier in the day before the talks that could see Brussels take the unprecedented step of rejecting Italy's proposed budget.

Stock markets in the region also weakened, led by a 1.30 percent fall for Prague followed by Warsaw with a 1.10 percent decrease.

In Poland, final results of Sunday's nationwide ballot for city hall chiefs and provincial assemblies may be published on Tuesday at the earliest.

Exit polls showed the eurosceptic Law and Justice (PiS) made only limited gains and lost a high-profile contest for Warsaw mayor.

"Warsaw's) ongoing stand-off with the European Commission should prevent the euro/zloty from breaching the 4.20 level until the second quarter of 2019," ING said.