The EUR/USD pair quickly returned to 1.09 after Tuesday's brief, rather a shallow retreat. This picture of the currency market suggests a stable and fairly good sentiment among investors, who may already be anticipating next week's meetings of the Federal Reserve, the European Central Bank and the Bank of England. Against the backdrop of low volatility, the forint's surge is the focus of attention.
Yesterday, the Magyar Nemzeti Bank decided to keep the base rate at 13% and maintain its current policy stance. Throughout 2022, the MNB was forced to hike rates to the highest level in the CEE3 region and introduce a rate corridor mechanism due to the ongoing weakness of the HUF, lack of credibility and limited foreign exchange reserves. With additional support leading to even higher effective rates in the money market, the forint regained ground in Q4 2022 as risk aversion faded. The EUR/HUF pair clawed back under the 400 handle and has recently remained stable. Even with this, it is still too early for the MNB to step back and withdraw from its additional, temporary measures. After the announcement, the forint rallied, and the EUR/HUF exchange rate breached the 390 level for the first time since early June 2022.
However, the tide may well turn against the emerging markets complex as global recession fears resurface. The HUF underperformed its peers in 2022 and would remain extremely vulnerable if markets sensed any hesitation in the central bank's actions. Hungary has the highest inflation rate in the whole European Union, which accounts for almost 25% year-on-year. Food and gas prices are skyrocketing, and core inflation remains in a steep upward trend.
Consequently, the National Bank of Hungary has no room for a dovish pivot as long as internal and external imbalances and vulnerabilities have not yet started to abate. Nonetheless, we expect the EUR/HUF to grind lower to reach 380 at the end of the year thanks to the weaker USD and better EM performance as global inflation peaks and markets look through the remainder of the tightening cycle by the Fed.