ING strategist Frantisek Taborsky highlights that risk-off global sentiment is pressuring Central and Eastern European (CEE) currencies, pushing EUR/PLN and EUR/CZK towards the upper ends of recent ranges. He warns downside risks are building as the US Dollar (USD) rallies and notes delayed economic impacts. While remaining bullish on Hungary, he flags profit-taking in Hungarian Forint (HUF) and a dovish Hungarian National Bank (NBH) stance that could undermine FX carry if EUR/HUF breaks above 365.

Risk-off mood pressures regional FX

"The risk-off global sentiment is clearly not in favour of CEE currencies, and as we discussed here on Monday, this is a reason for us to be bearish on FX here. CEE currencies have been trading very well since the start of the conflict, and even this week, despite some weakness, we have not seen a break from the usual ranges. For now, we will rather move towards the upper edges of EUR/PLN 4.230-260 and EUR/CZK 24.250-400."

"On the other hand, the risks are building on the downside with the rally of the US dollar in recent days. We will also only see the negative impact on the economy and current account in the numbers in the coming months."

"The Hungarian forint, as usual, has been in its own universe since the April elections, but here too we see some influence from the global trends. The local story saw most of the expected headlines after the elections and investors may see some exhaustion here. We remain bullish on Hungary, but of course people will want to take some profit and FX is, in our view, the first candidate given the long positioning within HUF assets."

"In addition, the National Bank of Hungary has indicated a dovish stance which will undermine FX carry somehow. EUR/HUF closed at 362 yesterday. It doesn't mean much for now, but if we were to go above 365, the level where the market started to price in NBH rate cuts, someone may start unwinding rate cut bets and FX weakness would start to be passed into the rates market as well."

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