Hungarian Forint: Bullish FX stance faces global headwinds – ING

ING’s team sees the Forint supported by fiscal consolidation expectations and steps toward Euro adoption, but warns that global factors such as higher energy prices, a strong US Dollar and eurozone bond market stress could cap gains. Despite fragile positioning and risks, their FX outlook on the Forint remains bullish over the coming months.

Bullish FX view tempered by risks

"Hungary remains the key CEE story, with by far the largest long positioning across asset classes, driven by the idiosyncratic post-election narrative and prospects for euro adoption. Currently, the primary market focus is on fiscal policy and the draft budget for next year, rather than on monetary policy itself. In our view, market expectations regarding next year’s fiscal deficit are shifting downward, and we believe that an excessive degree of optimism has already been priced in."

"We believe this partly reflects elevated expectations surrounding the fiscal plans, with markets anticipating a frontloaded consolidation and a deficit target below 5% of GDP in 2027. While this looks ambitious, we believe it is within reach, though by no means automatic."

"The forint has proved more resilient to recent global sell-offs than in previous episodes. While EUR/HUF briefly approached 370, this level proved to be a hard ceiling. After the volatility seen in early October, the forint regained its footing and strengthened below 364 again."

"Given the global situation and massive long positioning, markets appear fragile; from our perspective, it makes little sense for the NBH to test the market in such an environment. Market pricing points to one additional rate cut, assuming that BUBOR returns to a level above the key policy rate by the end of the easing cycle. With global energy prices hitting new highs, it would not be surprising if the market were to price out these remaining bets on rate cuts, especially given the distinctly hawkish pricing seen elsewhere in the region, though we keep rate cuts in our own forecast."

"A more hawkish market stance, combined with the government’s ongoing steps toward euro adoption, should be positive for the forint. On the other hand, one cannot ignore adverse global conditions, such as higher energy prices, a strong US dollar, and troubles within the eurozone bond market. These factors make gains for the forint challenging to achieve, yet our FX outlook remains bullish."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)