BNY’s Head of Markets Macro Strategy Bob Savage expects rate cuts from the Bank of Israel and the Hungarian National Bank as inflation falls and exchange rates stay elevated. The Israeli shekel (ILS) and Hungarian forint (HUF) are described as sources of tightening, with attention on whether easing is precautionary or longer-lasting.
In Israel, the Bank of Israel decision is dated February 23, Monday, with an expected rate cut to 3.75% after a January surprise move. Inflation has not posted a positive month-on-month reading for three months and is expected to remain below 2.0%.
Israel Rate Decision And Shekel Tightening
The report describes domestic activity as robust, while USDILS is near multi-year lows. It also notes that small rate gaps versus the US Federal Reserve may limit outflows.
In Hungary, the Hungarian National Bank decision is dated Tuesday, February 24, with an expected 25bp cut to 6.25%. A January inflation reading pushed annual inflation to its lowest level in almost eight years.
The forint is also described as a source of tightening, and the report says its performance has detached from rate gaps versus the euro. It adds that there is room for further cuts.
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Trading Implications For Israel And Hungary
With the Bank of Israel set to decide on rates today, we see the expected cut to 3.75% as a direct response to January’s low inflation of 1.8% and the shekel’s persistent strength. The USD/ILS exchange rate holding firm near 3.25, a level not seen consistently since 2021, is tightening financial conditions more than the central bank wants. This move is largely priced in by the markets.
Given this predictability, implied volatility on USD/ILS options seems elevated, presenting an opportunity for traders. We should consider selling near-term volatility, as the central bank’s action is more likely to stabilize the currency than introduce a new shock. The small rate differential with the U.S. Federal Reserve further supports this view by limiting the potential for significant capital outflows that could weaken the shekel.
Tomorrow’s focus shifts to the Hungarian National Bank, which is expected to deliver a 25 basis point cut in response to inflation hitting a nearly eight-year low of 2.9% in January. The forint has been a major factor, with EUR/HUF trading around the 370 level, a significant strengthening from the levels we saw in early 2025. The market’s main question is not about this cut, but about the pace of future easing.
Unlike the situation in Israel, the uncertainty surrounding the scale of Hungary’s easing cycle suggests that buying volatility is the more prudent strategy here. The MNB’s forward guidance could easily surprise the market, sparking a significant move in the forint. There is ample room for the bank to cut rates much more aggressively if it chooses.
Therefore, we should look at purchasing one-month EUR/HUF straddles or strangles ahead of tomorrow’s announcement. This position will be profitable if the MNB signals a much faster, or even a slower, cutting cycle than what is currently anticipated, causing a sharp move in the exchange rate. It is a direct play on the market’s uncertainty regarding the central bank’s next steps.
Looking back, the robust currency performance in both nations during 2025 was a primary theme, defying initial expectations for weakness and contributing significantly to disinflation. This currency-led tightening is precisely what these central banks are now beginning to unwind. We are positioning for a controlled easing in Israel and a potentially more volatile one in Hungary.
