CZECHIA: Bank Board's Prochazka Thinks CNB Could Deliver One More Cut In 2026

Gilt futures trade either side of late Monday levels but stick to a contained 16-tick range around the open, last -7 at 91.21 with core global FI markets off Monday highs.

• Our technical analyst notes that recent price action highlights the Dec 16 low (90.50), and the Nov 27 high (91.93) as the important short-term directional triggers.
• Yields essentially unchanged across the curve, with 10s oscillating either side of 4.50% in recent weeks (4.49% last).
• GBP STIRs also essentially unchanged, with BoE-dated OIS fully discounting the next 25bp rate cut come the end of the June MPC (albeit with 21bp of easing priced through April) and 39bp of cuts priced through November. Terminal rate pricing steady around 3.35%.
• SONIA futures +0.5 to -1.0.
• Little of note on the UK calendar between now and the new year. Final manufacturing PMI data due on Friday.

ERZ6 rose almost 3 ticks yesterday, but upside was contained by the 97.90 figure and the contract remains well below the ~98.00 level seen at the start of this month. The ECB’s December decision was balanced on net, with the hawkish reaction to the policy statement/updated projections pared by a balanced and non-committal press conference from President Lagarde. There is little conviction at this stage to shift 2% terminal rate pricing, with hike expectations more tangible in 2027. 

• Of the 27 analyst reviews we read following the December ECB decision, 23 look for the deposit rate to remain at 2% through 2026. Exceptions on the dovish side are Morgan Stanley (2x more 25bp cuts to 1.50% terminal) and Bank of America (1x more 25bp cut to 1.75% terminal). Meanwhile, TD Securities see a 25bp hike by the end of next year.
• Focus in Q1 will be on whether start-of-year price resets (particularly in services) contribute to another bout of core disinflation, and whether improving momentum in sentiment data is realised in hard economic figures. Implementation of Germany’s fiscal spending plans remain a key point of interest.
• Euribor futures are +0.5 to -1.0 ticks versus yesterday's settlement levels.
• Note that with year-end effects seemingly contributing to volatility in overnight money market rates, we caution over-interpretation of ECB-dated OIS implied rate changes. The ESTR overnight rate rose to 1.934% yesterday from 1.926% on Dec 24, 1.925% on Dec 23 and 1.932% on Dec 22.

• USDCNH breaking lower in recent trade, printing below 6.99 for the first time since September last year. Authorities may act to slow any acceleration in the downtrend, but the outlook for CNY remains positive, with markets almost uniformly looking for USDCNY further below 7.00 in 2026.
• Moves in offshore Yuan follow the clear break below 7.00 in USDCNY overnight, despite the higher-than-expected fix at 7.0348 (vs. BBG market consensus of 7.0136). The fixing error stayed elevated at +212pips, but slightly tighter than yesterday's fix. This provided only temporary relief, however, with the downtrend in USDCNH, USDCNY resuming on reported FX selling by both corporate names and Chinese exporters.
• The rally in CNH and CNY bolsters and may embolden the Chinese authorities calls for proactive monetary policy in 2026 (as evidenced in a report in last week's Shanghai Securities News arguing in favour of easier interest rates and reserve requirement ratios in Q1), but other more direct tools remain available to smooth untoward CNY strength.
• Tools remain available to address unwanted near-term strength (namely buying USD without recycling the USD in swaps markets) but the recognition of the need for natural currency strength (largely to address strong external balances) is clear, hence the recent CEWC statement that argued for "stable" exchange rates, rather than calling out currency strength in particular. This makes USDCNY losses further beyond 7.00 far more likely longer-term.