Regional sentiment of Central European currencies in the global context

The co-movement of Central European currencies is due not only to economic links and the common history of the economies in the region. It also often reflects changes in global investor sentiment or the region's credibility, especially in times of financial market uncertainty and flight to safe assets. Therefore, one way to analyse the effect of external factors influencing short-term FX dynamics is via the co-movement of currencies. In this article, we outline a method for extracting the co-movement of currencies in a region and concentrating it into a simple indicator. With this method, we revive the discussion on the factors affecting exchange rates. As well as macroeconomic fundamentals, these include financial market sentiment, which reflects investor sentiment and confidence in the region. We show that the depreciation of Central European currencies in the past year was due not only to geopolitical uncertainty in Europe, but also to unprecedentedly high investor interest in the US dollar, which benefited from the Fed's assertiveness in combating inflation. Conversely, concerns of an economic downturn and the less resolute and - in the opinion of some - belated actions of the ECB had a negative impact on the euro.