The National Bank of Hungary has kept interest rates steady at 6.50%. Their future guidance remains firm to help lower inflation and support currency stability. This decision contrasts with recent government statements. Currently, the EUR/HUF exchange rate ranges between 389 and 390, which is considered reasonable. Expectations suggest that rates will hold steady until mid-year, even with risks like falling inflation or other central banks lowering their rates. The bank’s consistent approach is shown by stable rates and exchange rates, with little impact from geopolitical discussions, such as the upcoming Trump-Putin meeting.

Central European Currency Outlook

The chance of a ceasefire between Ukraine and Russia is looking less likely, which reduces the attractiveness of the Hungarian forint, especially in the Central and Eastern European markets. There is a need for a new event if we want to see any significant changes in the current EUR/HUF exchange rate. The National Bank of Hungary’s prior commitment to high rates feels like a thing of the past, especially after the aggressive rate cuts that started in late 2023. Back then, the base rate of 6.50% was the standard, but this has completely changed as inflation decreased. Now, inflation sits at around 4.5% year over year, giving the central bank room to lower borrowing costs. The high-interest advantage that once helped the forint has faded over the past 18 months, making carry trades less appealing. Hungary’s base rate has dropped to 4.00%, reducing the gap over the ECB’s main rate to just 100 basis points, down from 250 points in early 2024. This decline explains the lack of interest from investors and the stability around the 395 level for EUR/HUF.

Volatility and Derivative Trading Strategies

In this low-volatility climate, implied volatility in EUR/HUF options has plummeted. One-month volatility is now around 5%, a significant drop from the double-digit rates seen during the geopolitical turmoil of 2023. For traders dealing in derivatives, this suggests that selling options, like short strangles, could be a good strategy to earn premiums in the weeks ahead. The hoped-for major peace summit in Budapest after the 2024 US election not materialized. Continuing disputes with the European Union over funding remain the key political issue impacting the currency. While selling volatility seems wise, purchasing inexpensive, out-of-the-money EUR/HUF call options could provide an affordable safeguard against any sudden political tensions. Create your live VT Markets account and start trading now.

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