The Hungarian currency set out on a strengthening path in the first week of 2021 as optimism that vaccinations will curb the pandemic and Democrats’ Senate election gains in the U.S. boosted international investor sentiment. The forint reached its strongest level against the USD in 2.5 years on Thursday.
The forint appreciated sharply in the first days of the new year on the interbank market, with the currency strengthening to close to 357 against the euro and close to 290 against the dollar. The former is almost a 2.5-week peak and the latter nearly a 2.5-year record. The strengthening is a correction after the usual end-of-the-year volatility, according to foreign currency traders. Optimism related to the start of vaccinations in Europe is helping currencies in the central and eastern European region. The next important technical support level for the forint is the 200-day moving average at 355.20, analysts at Erste Bank wrote in a research note.
US politics in focus
Markets were keenly awaiting the results of the U.S. Senate elections in Georgia that will have a significant impact on U.S. fiscal policy. Results showed that the Democratic Party took control of the U.S. Senate and this fueled expectations of an expansionary fiscal policy in the U.S., which lifted market sentiment in the CEE region as well. As a result of Democrats’ victory in Georgia, the hurdles of implementing President elect Joe Biden’s ambitious economic relief plans have been removed. This in turn has significantly boosted risk appetite in international markets, helping lift CEE currencies higher.
As Democrats hold the majority in the House of Representatives and now in the Senate as well, this paves the way for Biden's plans to increase taxes and change the country’s climate policy, which will likely results in a wider budget deficit. The US dollar weakened to its lowest level against the EUR in nearly 3 years on Wednesday. Generally speaking, a weakening US dollar is good news for European emerging market currencies.
Chaotic events that unfolded in the U.S. capital on Wednesday where protesters temporarily broke into the Capitol building failed to dampen market optimism.
The forint has moved in tandem with other currencies in the CEE region, showing that the strengthening is not due to country-specific reasons.
Based on technical indicators, the EUR/HUF currency pair is by no means oversold and not moving close to significant support levels. This means that there is still room for further forint strengthening. The 200-day moving average is at 355.4 and the uptrend line is at 355. These support levels are likely to temporarily stop the forint from marching on to stronger levels. It’s worth keeping an eye on the exchange rate of the forint against the U.S. dollar, as the rate dipped below 290 in recent days. It is possible that the forint will conquer the support level around 289 and this will allow the Hungarian currency to strengthen considerably against the dollar. This in turn would have a positive effect on the EUR/HUF exchange rate as well.
The current positive developments in the forint are due to external factors and a souring of international investor sentiment may put an end to recent strengthening of the Hungarian currency. Market analysts believe that due to the uncertainties surrounding the global pandemic, 2021 is likely to bring a lot of volatility on international markets.
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