Headlines suggesting the US-Iran conflict may be nearing an end drove a risk-on rebound that helped Central and Eastern European currencies recoup recent losses. The zloty recovered after testing the top of its 4.225–4.260 range, while EUR/HUF set fresh lows below 354; sentiment was expected to stay constructive into the next session. The move came as oil prices fell, though the decline was described as insufficient to alter central bank thinking given inflation effects already feeding through.
Policy expectations remain central. The Czech National Bank was described as leaning towards a rate rise next week, regardless of whether geopolitical tensions ease quickly. For the National Bank of Hungary, the base case was framed as a 25 bp cut in two weeks, but a 50 bp move was also flagged as possible if the forint strengthens, with EUR/HUF potentially rallying towards 350 in a post-conflict relief scenario.
Risk-On Sentiment and Currency Rebound
We are seeing markets switch back into a risk-on mood as news of a potential US-Iran de-escalation circulates. This has allowed currencies like the zloty and forint to regain ground after recent weakness. While Brent crude has dipped about 7% this past week to around $88, this drop isn’t yet significant enough to alter central banks’ inflation concerns.
Diverging Central Bank Policies and Trading Strategies
For the Czech koruna, we believe the path is already set for a rate hike next week. Recent inflation data showing a 3.1% year-over-year figure for May keeps the pressure on the Czech National Bank to act. This divergence suggests traders could look at call options on the koruna or strategies that profit from rising Czech short-term interest rates.
In Hungary, the story is different as we anticipate a rate cut from the National Bank of Hungary in two weeks. Our baseline is a 25 basis point cut, but a larger 50 basis point move is possible if continued risk-on sentiment pushes the EUR/HUF exchange rate down towards the 350 level. This uncertainty about the size of the cut creates an opportunity for traders using volatility strategies, like straddles, on the forint.
This clear policy divergence between a hiking Czech National Bank and an easing National Bank of Hungary presents a compelling regional trade. We are positioning for this by favoring the koruna against the forint (long CZK/HUF) in the coming weeks. This type of divergence play has historically performed well during periods of shifting central bank cycles.
