Hungary’s inflation rate is 4.3%, slightly below the expected 4.5%. This could indicate strength for the Hungarian Forint (HUF). However, core inflation rose from 3.9% to 4.2%, surpassing the central bank’s acceptable level, which delays projected interest rate cuts. The public finance deficit has been revised upward: from 4.3% to 5.0% of GDP for this year and from 3.7% to 5.0% for next year. As a result, the market reacted by steepening the yield curve, increasing pressure on bonds. This was somewhat expected due to upcoming elections.

Market Reaction

The EUR/HUF exchange rate increased by 0.5%, though the forint regained some value. This suggests that the market has already considered the expected additional spending. Currently, foreign exchange seems more stable than fixed income, with the rate staying below 386 EUR/HUF. This indicates that the market is adjusting, with little change expected in the near term. Recent data from October 2025 shows headline inflation dropping slightly to 3.8%. However, core inflation remains stubbornly high at 4.1%, well above the central bank’s target. This persistence implies that the Hungarian National Bank will continue its strict monetary policy, keeping short-term interest rates elevated into early 2026. This strong stance supports the forint. Simultaneously, the government’s fiscal policy is creating opportunities for traders. The public finance deficit is projected at 5.1% of GDP for 2025, causing unease in the bond market. A similar pattern was noted before the 2022 elections, which historically put stress on government debt.

Investment Strategy

This tension is causing the yield curve to steepen, as long-term bond yields rise to offset higher fiscal risks. For derivative traders, this is a signal to engage in curve steepener trades using interest rate swaps. This strategy positions them to benefit as the gap between long-term and short-term rates widens. The premium for holding long-term Hungarian government bonds is likely to increase. In this environment, the forint is a more stable asset compared to government bonds. The central bank’s focus on controlling inflation supports the currency, which we expect will remain strong below the 386 level against the euro. Selling EUR/HUF call options with strikes around 388 could be a smart strategy to earn extra income from the currency’s expected stability. Create your live VT Markets account and start trading now.

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