Czech Koruna/US dollar forecast ahead of June 2023 Fed decision

June is an interesting month for monetary policy and those market participants interested in trading currencies. All major central banks are due to release their monetary policies (e.g., Federal Reserve of the United States, European Central Bank, Bank of England, Bank of Japan), and so, starting next week, volatility will increase.

But besides developed economies, emerging ones present opportunities to FX traders. One such economy is the Czech Republic economy, one of the emerging markets in Europe.

The local currency, the Czech Koruna (CZK), rallied against the US dollar since the end of last year. Now that the Fed is due to announce its policy, what are the implications for the CZK/USD exchange rate?

The Czech National Bank faces a tough time fighting inflation

The Czech National Bank (CNB) decided at the last Bank Board meeting on May 3, to keep the two-week repo rate at 7% and the discount rate at 6%.

One may say that these are not so much higher than the 5.25% in the United States – which is a valid point, especially looking at the inflation rate in the Czech Republic and comparing it with the annual inflation rate in the United States.

At one point, the annual inflation following the COVID-19 pandemic in the Czech Republic reached 18% – almost double the maximum annual inflation rate registered in the United States (9.06% on June 2022).

But the problem is that both central banks have the same price stability mandate – bringing inflation back to 2%. Therefore, if the Fed is to remain on pause next week, as rumors have it, the CNB may decide to hike the interest rates again as higher inflation indicates.

According to the IMF, the Czech Republic’s GDP is set to grow in the next five years using current prices, but the Real GDP, which accounts for inflation, shows a more moderate growth.

CZK/USD trades in a tight range for 7 years now

Ranges are meant to be broken, but the CZK/USD horizontal consolidation is long. For the last seven years, this market went nowhere, and the safest play in town was to sell resistance a 0.048 and buy support at 0.049.

But that might change this June, providing two things happen.

First, the Fed might pause its rate hiking cycle – a dovish move for the US dollar. However, the greenback may actually appreciate if accompanied by hawkish rhetoric, such as hinting at a rate hike in July. Therefore, a move below 0.044 might be in the cards.

Second, on June 21, the CNB’s Bank Board will decide on its monetary policy. Given the inflation differential mentioned earlier, a rate hike would put the Kurona in advantage, and thus, the CZK/USD exchange rate might test the 0.048 resistance again.