06:18 AM EST, 02/07/2025 (MT Newswires) -- The European Central Bank will publish its staff revision on the neutral rate on Friday, noted ING.

President Christine Lagarde said last week that r-star is "a range that does not give a guideline or a destination" and Governing Council member Olli Rehn added Thursday that "we should not constrain our freedom of action because of a theoretical concept."

That said, with the next couple of cuts not particularly up for debate, a lot of the action in pricing is focused on the terminal rate, wrote ING in a note. The scope and timing of United States trade tariffs would have a big say, but while markets await President Donald Trump's move on the European Union, Friday's report is all markets will get in terms of terminal rate guidance, and ING expects a euro reaction.

Based on Rehn's comments and the fact that r-star projections are model-based -- embedding significantly higher inflation than in the past -- the bank's best guess is that Friday's note will show a relatively high rate and send a hawkish signal. When adding downside risks for U.S. payrolls due later Friday, ING favors a new leg higher in EUR/USD to retest the 1.044 Wednesday highs.

Thursday's Czech central bank (CNB) meeting brought several surprises, stated ING. Ahead of the meeting, data showed that inflation slowed less than expected, dropping to 2.8% year-on-year from 3.0% in December, mainly due to food prices. Investors won't know the core inflation numbers until next week but the breakdown from the flash report suggests a "weak" number.

However, the CNB did cut rates by 25bps to 3.75%. The central bank also unveiled a new forecast that is more or less in line with ING's expectations. The gross domestic product outlook was revised down closer to the bank's forecast, EUR/CZK and inflation were revised down, while the rates path is slightly higher this year but lower next year.

The press conference was accompanied by the usual hawkish tone, but ING found the tone slightly softer compared with previous meetings. The CNB is visibly open to further rate cuts, but the bank also knows that the Board believes it's close to the end of the cutting cycle.

Markets remained essentially flat in the rates space however the koruna (CZK) did rally some, much like the rest of the region. Although ING dropped its bearish bias on Thursday, EUR/CZK should remain higher in the 25.100-200 range.

Given weaker inflation, ING predicts rate cuts to be on the table for the next meeting, which should keep the CZK at current levels.

Poland's central bank (NBP) press conference offered little new information compared with previous meetings, added ING. However, the lack of new developments suggests a less hawkish stance for markets.

As such, the discussion of rate cuts was enough for markets to rally a bit. Although investors didn't hear anything new on the timing, markets did raise the pricing of rate cuts with the first move in July and a total of 75bps of cuts this year. This roughly matches ING's expectations of 50bps-100bps in the second half of the year.

Rates rallied after the press conference on Thursday, but at the same time, foreign exchange saw further support. Similar to Central and Eastern European (CEE) peers, Poland's zloty (PLN) saw further gains despite a lower EUR/USD and narrower differential after rates rallied.

CEE had a strong week overall, possibly due to the mention of progress on a Ukraine deal with Russia from the new U.S. administration, noted the bank. Investors may know the details next week.

However, the simultaneous rally in foreign exchange and rates suggests that positive sentiment on this is likely driving the move. EUR/PLN reached new lows on Thursday, and ING doesn't expect changes anytime soon.