Insights 
VT 
The National Bank of Hungary maintained interest rates at 6.50%, with forward guidance staying hawkish, supplemented by an FX stability stance to aid lower inflation. This move seems to counteract recent government comments, while current EUR/HUF exchange levels at 389-390 are deemed fair.
There is an anticipation for rates to remain unchanged until mid-year, despite potential dovish risks like reduced inflation or other central banks cutting rates. The bank’s predictability is reflected in stable rates and FX, with minimal impact from geopolitical meetings such as the anticipated Trump-Putin meeting.
Central European Currency Outlook
The possibility of a ceasefire between Ukraine and Russia seems reduced, affecting the Hungarian forint’s appeal, particularly in the Central and Eastern European region. Observations indicate that a fresh catalyst is necessary for significant changes in the current EUR/HUF exchange rate levels.
We see the National Bank of Hungary’s previous hawkishness as a distant memory, given the aggressive rate-cutting cycle that began in late 2023. Back then, a 6.50% base rate was the anchor, but that policy has been completely unwound as inflation fell. With consumer price inflation now hovering around 4.5% year-over-year, the central bank has had significant room to lower borrowing costs.
The high-yield advantage that once supported the forint has evaporated over the last 18 months, making carry trades far less attractive. Hungary’s base rate is now 4.00%, narrowing the premium over the ECB’s main rate to just 100 basis points, a significant drop from the 250-point gap we saw in early 2024. This compression explains the lack of investor appetite and the current stagnation around the 395 level for EUR/HUF.
Volatility and Derivative Trading Strategies
Given this low-impulse environment, implied volatility in EUR/HUF options has collapsed. One-month volatility is currently priced near 5%, a stark contrast to the double-digit figures we saw during the geopolitical uncertainty of 2023. For derivative traders, this suggests that strategies involving selling options, such as short strangles, could be effective for collecting premium in the coming weeks.
The geopolitical catalyst of a major peace summit in Budapest never materialized as some had hoped following the 2024 US election. Instead, persistent disputes with the European Union over funding disbursements remain the dominant political factor weighing on the currency. Therefore, while selling volatility seems prudent, buying cheap, out-of-the-money EUR/HUF call options could serve as a cost-effective hedge against any sudden escalation in political tensions.
