In Turkey, the CBT recently communicated its intention to implement the "simplification" of interest rate policy following the Fed rate hike in December. In line with this strategy the CBT raised remuneration on FX required reserves by 25bp on Thursday following the Fed rate decision. A 50bp hike to the one-week repo rate is expected in the December MPC meeting (on 22 December), and ultimately raising it to 9.5% by the end of Q1 16. Although no change is expected in the O/N lending rate in the near term, cuts are predicted to start in Q2 16. Clearly, this forecast is highly dependent on the path of inflation and more so on the capital flows outlook. 

The overwhelming consensus view is for the CBT to lift one-week repo rates in the December MPC. However, a hike in the one-week repo rates will not be very relevant for the money market rates, as interbank rates hover around the O/N lending rate, which is higher. But it is likely to have some signalling power regarding CBT's room for manoeuvre against a backdrop in which the CBT's vulnerability to political pressures has risen. Consequently, Turkish assets would react negatively if the CBT takes no action in next week's MPC meeting.

Bank of Israel is expected to keep its base rate unchanged at 0.10%, notwithstanding the Fed rate hike and subsequent ILS depreciation. Inflation is still well below the target at -0.9% y/y in November and growth has been somewhat disappointing in recent quarters, particularly with exports being weak. 

"While BoI has a dovish bias, we do not think it has the intention to move into negative rates at the moment. Meanwhile, BoI maintains its bias for a weaker ILS and we expect this to materialize when the interest rate differential widens in favour of US and USD strength resumes. We are long USDILS (target: 4.10, stop: 3.65, trade initiated on 25 June 2015)", says Barclays.

Separately, inflation numbers out of Poland and Turkey will remain in the spotlight. In Poland, CPI is expected to remain in deflation in December (-0.4% y/y). Core inflation will remain weak in the near term, supporting the call for NBP to cut its main policy rate by 75bp next year. This, together with prevailing political uncertainty, nicely dovetails with the trade recommendation of long USDPLN (target: 4.2885, stop: 3.8120, trade initiated on 12 November 2015). In Turkey, disinflationary impact of Russian sanctions on domestic food prices are expected to limit the uptick in inflation (December annual CPI forecast: 8.2% y/y).