Hungary’s central bank kept rates unchanged but struck a notably dovish tone, opening the door to rate cuts and pushing markets to price in deeper easing, with EUR/HUF facing renewed upside pressure, ING's FX analyst Frantisek Taborsky notes.

EUR/HUF upside risks build

"The National Bank of Hungary left rates unchanged at 6.50% yesterday, as expected. The new forecast brought a dovish shift, with inflation moving from 3.8% to 3.2% on average next year and, at the same time, worsening the economic outlook. However, the main surprise came from the press conference and the dovish tone of Governor Mihaly Varga. The Governor mentioned that he will evaluate new data on a meeting-by-meeting basis and, if the numbers are favourable, the central bank will be ready to cut rates."

"Although the market was preparing for a possible dovish tone, the central bank managed to surprise. Rate markets have 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 yesterday and our updated forecast, we see room for the market to price in more rate cuts, particularly if inflation numbers continue to surprise on the weaker side."

"The HUF reversed all earlier gains yesterday and is weakening slightly, but we still believe that EUR/HUF will go up in the coming days. The rate differential vs EUR is heading towards the narrowest levels since May, indicating upside for EUR/HUF in the range of 386-388. On the other hand, the dovish turn comes in favourable conditions for the central bank. The region is receiving support from growing hopes for a peace agreement between Ukraine and Russia, from which HUF would benefit the most within the CEE region, in our view, and EUR/USD is testing new highs. If the trend does not turn in these two stories, it will mitigate the upside risk in EUR/HUF and the central bank may feel the market support in a dovish direction looking forward."