The forint marched to considerably stronger levels against both the EUR and USD this year after being in a freefall in 2022. Experts believe the Hungarian currency has by now reached key technical levels and further significant strengthening may not be in the cards.
The Hungarian currency has staged a spectacular comeback in recent weeks from record lows visited last year. The forint strengthened significantly against both the euro and the dollar, having gained almost 90 points against the latter since the emergency interest rate hike in October and the dollar's global turnaround. The relative regional underperformance of the forint has eased considerably and the forint is slowly catching up with the one-year performance of the zloty.
The forint strengthened to as low as 392 against the euro this week after hitting levels above 430/EUR in the fall of 2022. The trajectory of the Hungarian currency against the US dollar shows a similar picture.
The forint’s spectacular weakening in 2022 came amid an aggressive interest rate hike cycle delivered by the National Bank of Hungary. The nation’s central bank raised interest to 13% in December 2022 from 0.6% since the start of the rate hike cycle.
Strong march against the dollar
The forint’s stellar performance against the US currency is also driven by the fact that the dollar has come under pressure lately. The relative dollar weakness is due to the ongoing dovish repricing of Fed rate expectations and hawkish rhetoric by the ECB point to upside risks for EUR/USD in the near term. For now, however, markets may feel comfortable with the current dollar levels ahead of next week’s fresh round of data releases in the US. Discussions over the US debt ceiling are set to be an important driver for markets, but we currently see this having a material impact on the FX market only around the late summer.
Against the backdrop of a fluctuating international investor mood, ECB President Christine Lagarde’s speech in Davos will carry special importance as her message could push the euro/dollar from the unusually narrow trading range of the past few days. In turn, this could affect emerging market currencies, including the forint.
Key technical levels
Analysts say that the forint's exchange rate is testing key technical levels against both the euro and the dollar. The USDHUF fell nearly 90 units from 450 to 360 after the emergency interest rate hike in October and the global turn of the dollar. The exchange rate is now close to the 61.8% Fibonacci correction level (362) of the great forint weakening seen from last spring to autumn. This is an important technical level that may put a stop to the further march of the forint.
The forint's has been the absolute underperformer last year among regional currencies such as the Czech koruna, the Polish zloty and the Romanian leu. seen from last January until now represents regional underperformance. With the sharp turnaround in the forint’s rate seen so far this year, this underperformance is decreasing substantially. In fact, with the recent weakening of the zloty and the strengthening of the forint, the latter’s relative underperformance is now only 4% compared to the Polish currency.
As for the outlook, the recent drop in international gas prices and a higher EUR/USD exchange rate are a strong support for emerging market currencies such as the forint, meaning that a significant turnaround in the Hungarian currency’s performance is also unlikely. Markets will watch closely the central bank’s first interest rate meeting of the year on Tuesday. Investors are keen to see whether the central bank will make a cautious reference to a reduction of the benchmark interest rate.
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