The central bank has once again sent a signal that cutting rates is not on the table for quite some time. The hawkish message comes just as the CEE FX market is feeling the relief of a Middle East ceasefire, further fuelling the rally in the forint today. In the last two days, we have gone from levels around 404 to within reach of 401 at the end of the press conference. Of course, future developments are highly dependent on the geopolitical landscape, but if we assume no major shifts in the narrative, the conditions for stronger CEE FX in the summer should be supportive of the forint. With EUR/USD hovering around 1.160 and the regional risk premium being priced out, EUR/HUF could once again approach the 400 mark. This is a key threshold but it’s uncertain whether current tailwinds will be strong enough to drive it lower. Given the deteriorating outlook for the Hungarian economy, confirmed today in the new NBH forecast, the market will push for more rate cuts later on, either this year or next. This should push EUR/HUF up again, with 415 in our year-end forecast.
The market corrected expectations recently and, since the beginning of May, has erased about 50bp of easing. Still, the market is pricing in roughly 100bp of cuts in total, with one cut this year and the rest next. On the one hand, the NBH has shown a significantly worse GDP outlook, coming in below our forecast, and on the other, it has raised the inflation profile by 0.3pp next year on average.
Overall, 100bp still seems like too much in the current context, but at the same time, global and local conditions are changing very quickly, so it’s hard to challenge this view from current levels. We still prefer the pay side of the market at the front-end and the belly of the curve. The long-end has fallen off a bit in recent days, following core markets, with the 5y5y going from 7.45% to 7.25%, where the market may see a chance to pay again. At the same time, we don’t see the current inflation problem in Hungary as too hot for the market due to the weak GDP outlook, and the long-end thus seems too high despite the recent decline from the peak.