Recent Developments in the Market
The market had become increasingly dovish in recent days, but the central bank still managed to surprise with its latest moves. This has led to significant changes in the rates market, with more rate cuts now being priced in. The FX market, on the other hand, appeared somewhat confused after the press conference, with the forint reversing its earlier gains and weakening slightly.
Impact on Currency
Despite the current weakening, it’s believed that EUR/HUF will go up in the coming days. The rate differential vs EUR is heading towards its narrowest levels since May, indicating potential upside for EUR/HUF in the range of 386-388. This shift is largely due to favorable conditions for the central bank, including growing optimism about a potential peace agreement between Ukraine and Russia.
Regional Implications
The Hungarian forint (HUF) stands to gain the most within the Central and Eastern European (CEE) region. Meanwhile, EUR/USD is currently testing new highs. If these trends persist, the upside risk for EUR/HUF will be limited, and the central bank may interpret market conditions as supportive of a more dovish stance going forward.
Rate Cuts and Market Predictions
The rates market has priced in an additional 10bp of rate cuts next year, for a total of 60bp, and the terminal rate has fallen to 5.72% in 2027. Given the central bank’s dovish tone and updated forecast, there’s room for the market to price in more rate cuts, particularly if inflation numbers continue to surprise on the weaker side.
Long End and Curve Dynamics
The long end has seen a similar rally, but the curve is maintaining its expected steepening bias, which is likely to persist. The long end remains anchored higher following the announced increase in the public deficit for this and next year, and the priced-in term premium is likely to remain until at least the April general elections in Hungary.
Conclusion
In conclusion, the central bank’s recent moves have led to a dovish shift in the market, with implications for both the rates and FX markets. While there’s potential for further rate cuts and changes in the EUR/HUF exchange rate, the long end of the curve is expected to maintain its steepening bias. As market conditions continue to evolve, particularly with regards to inflation and geopolitical developments, the central bank’s stance is likely to remain supportive of a more dovish approach.
