Hungary Rate Decision Could Have Little Impact on Forint — Market Talk

The Hungarian forint falls after Hungary's Ministry of National Economy raised its budget deficit targets. The deficit targets for 2025 and 2026 were both increased to 5% of gross domestic product. The move comes as Prime Minister Viktor Orban ramps up spending ahead of parliamentary elections in April. Investor sentiment remains uneasy, likely due to looming sovereign rating decisions with the threat of credit rating downgrades, ING economists say in a note. The euro rises 1.1% to 385.36 forint. (renae.dyer@wsj.com)

The Czech central bank has greater potential to support its currency than the Hungarian central bank in policy decisions later this week, ING analyst Frantisek Taborsky says in a note. The Czech and Hungarian central banks are both likely to leave interest rates unchanged and sound cautious about the prospect of future rate cuts, he says. Given the long position already in the forint, or bets on it rising, the Czech koruna has more scope to rise, he says. Hungary's rate decision is on Tuesday followed by the Czech decision on Wednesday. The euro falls 0.2% to 389.55 forint and is flat against the koruna at 24.267. (renae.dyer@wsj.com)

The Hungarian forint should recover if Hungary's central bank remains cautious about cutting interest rates in a policy decision later, Commerzbank analyst Antje Praefcke says in a note. While inflation in Hungary is gradually easing, it remains at a high level, she says. "[Hungary's central bank] is therefore likely to leave its key interest rate unchanged at 6.50% today and maintain its cautious stance." This could allow the forint to regain some ground, she says. Any deviation from the fight against inflationary risks, which is unlikely, would weaken the forint, she says. The decision is at 1200 GMT. The euro rises 0.7% to 397.74 forints after earlier reaching a nearly three-week high of 398.14, LSEG data show. (renae.dyer@wsj.com)

The Hungarian forint is likely to remain relatively stable in the coming quarter as Hungary's central bank stays cautious over cutting interest rates, Commerzbank's Tatha Ghose says in a note. The central bank is expected to leave rates unchanged in a decision at 1200 GMT. The central bank's stance comes even as core inflation moderates, pushing real rates adjusted for inflation higher. Its position has also become more convincing due to no frequent contradictions from government leaders, prompting markets to expect higher for longer rates. This is helping the forint perform "much better than it was doing six months ago." The euro rises 0.2% to 399.09 forint but has fallen 2.8% over the past six months, LSEG data show. (renae.dyer@wsj.com)

The European Commission's (EC) two trillion euros budget proposal has continued to face harsh criticism from Germany. with the prime minister admitting it will be a "tough fight over the budget for the next two years," said ING.

The possibility that EC President Ursula von der Leyen's proposal will secure unanimous approval without being materially watered down looks very slim, wrote the bank in a note to clients.

That was, anyway, meant to be a long-term topic for the euro, which for now continues to track United States developments amid dormant European Central Bank rate expectations, stated ING. However, next week's ECB policy meeting may prove less dull than expected. A cut is highly unlikely given recent communication, but tariff risks and a strong euro could revitalise a dovish front that otherwise seemed settled on a neutral pivot.

That is another factor keeping the bank moderately bearish on and ING continues to favor a move to 1.150 in the near term.

The end of the week in the Central and Eastern European (CEE) region should be quiet, according to ING. The calendar doesn't have much to offer on Friday. However, the global story continues to shape sentiment.

Although on Thursday the bank saw Hungary's forint (HUF) outperforming its CEE peers, in the rates space ING saw the opposite picture.

While Poland's zloty (PLN) and the Czech koruna (CZK) continue to be paid, leading to a wider interest rate differential, in HUF rates on Thursday, investors saw a reversal in the differential after nearly 10 days, added ING. As a consequence, the bank believes has little chance but to test new lows towards 398 and the current range of 399-400 should roughly still work.

On the positive side, there's Hungary's central bank (MNB) meeting next week, but given the market pricing, the hawkish tone shouldn't bring much support for currency. Elsewhere in the region, rate-paying flows continue to support foreign exchange, and both CZK and PLN should retain some backing despite a stronger US dollar (USD) and their underperformance on Thursday.

Aside from Wednesday's very brief spike induced by Federal Reserve Chair Jerome Powell removal speculation, looks rather comfortable trading in the low 1.16s, said ING.

That's despite US dollar (USD) short-term swap rates trading some 4bps-5bps below Wednesday's peak, as risks of the new Fed chair being an ultra-dove increased, wrote the bank in a note.

Anything European Union-related appears to be playing second fiddle to , stated ING. French political noise can return in the fall and generate some currency spillover, but for now it's not showing any tangible impact on foreign exchange.

On the broader EU level, the European Commission (EC) has proposed a two trillion euro increase in the EU budget, which has already been rejected by Germany. There's a long period of negotiations ahead as EC President Ursula von der Leyen aims to gather a unanimous consensus on the budget increase by 2027. Investors will hear a lot about this along the way, and the implications for the long-term value of the euro are non-negligible.

"Moribund" eurozone productivity relative to the United States has contributed to keeping the medium-term fair value capped in the past decade, pointed out the bank. Back to the short term, ING thinks risks are balanced for and heavily U.S. data dependent. In the coming weeks, the bank believes a move to 1.150 looks more likely than 1.170.

Last month, a surprise 109,000 fall in May United Kingdom payrolls opened the discussion on whether the Bank of England had to accelerate easing. That figure was revised massively on Thursday to just -25,000. June added another 41,000 worth of job losses, which confirms a clear softening pattern, but the big revisions for May should take some heat off the BoE, added ING.

Wage growth is also still too high for the BoE's liking, though, on a three-month annualized basis, private sector pay is rising at 3.6%, which is better than the year-on-year numbers indicate and is lower than the bank saw much of last year. reaction to the data has been modestly negative, but given the bar for a BoE dovish repricing is now higher, the 0.870 level should work as a sturdier resistance.

Hungary's forint (HUF) saw a decent rally in June and ING has seen building long positioning in the market as a view of high carry and lower volatility during the summer. While there have been many market calls at 390-395 levels, the bank remains in a more neutral camp at current levels around 400 .

Markets have priced out most of the rate cuts and ING can't see more support from this side. Although the bank doesn't predict rate cuts this year, July should show weaker inflation numbers, which may lead to more dovish pricing and again undermine HUF strength. As such, ING doesn't expect much from current levels now and in future sees to rise again to 410 by the end of the year in its forecast under more dovish market pricing.